FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 October 28, 1999.
Title Outstanding
Common Stock, par value $.10 per share 22,790,450
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ARGONAUT GROUP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION: Page
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998....................... 3
Consolidated Statements of Income and Comprehensive Income
Three Months and Nine Months Ended, September 30, 1999 and 1998.4
Consolidated Statements of Cash Flows
Three Months and Nine Months Ended September 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 September 30, 1999 and 1998...............7
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings........................................9
Item 6. Exhibits and Reports on Form 8K..........................9
Signatures..........................................................10
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Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In million except per share amounts)
<S> <C> <C>
Sep 30, 99 Dec 31, 98
(unaudited) (audited)
ASSETS
Investments:
Fixed maturities, available for sale, at fair value $792.3 $942.8
(cost: 1999 - $810.4; 1998 - $915.5)
Equity securities, available for sale, at fair value 403.7 408.5
(cost: 1999 - $201.8; 1998 - $197.4)
Short-term investments, available for sale, at fair 12.9 19.9
value
Securities in transit 0.4 1.6
---------- ----------
1,209.3 1,372.8
Cash and cash equivalents 12.6 24.5
Accrued investment income 13.6 18.7
Receivables:
Due from insureds 100.8 103.7
Due from reinsurance 215.8 196.1
Accrued retrospective premiums 48.4 52.8
Cost in excess of net assets purchased 33.4 35.5
Unearned premiums on ceded reinsurance 1.1 0.9
Other assets 13.8 15.5
---------- ----------
$1,648.8 $1,820.5
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss adjustment expenses $877.4 $935.8
Unearned premiums 33.6 36.8
Accrued policyholder dividends (2.9) (2.5)
Deferred Federal income taxes 1.4 14.2
Other liabilities 58.9 81.8
---------- ----------
968.4 1,066.1
---------- ----------
Shareholders' equity:
Common stock - $.10 par, 35,000,000 shares
authorized, 22,888,150 and 24,077,792 shares
issued and outstanding at September 30, 1999
and December 31, 1998, respectively 2.3 2.4
Additional paid-in capital 98.9 102.9
Retained earnings 459.8 494.1
Net unrealized appreciation on securities 119.4 155.0
--------- ----------
680.4 754.4
---------- ----------
$1,648.8 $1,820.5
=========== ==========
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Argonaut Group Inc. and Subsidiaries
Consolidated Statements of Operations
(In millions except amounts per share) For the Quarter For the Nine Months
(unaudited) Ended September 30, Ended September 30,
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
Premiums and other revenue:
Premiums, net $27.2 $33.6 $88.4 $105.8
Net investment income 17.2 19.0 52.1 58.8
Gains on sales of investments 0.9 7.8 2.3 50.1
------ ------ ------ ------
Total Revenue 45.3 60.4 142.8 214.7
Expenses:
Losses and loss adjustment expenses 23.2 25.8 62.1 72.6
Underwriting, acquisition, and
Insurance expenses 14.3 18.1 46.2 56.4
Amortization of cost in excess of
net assets purchased 0.7 0.7 2.1 2.1
Policyholder dividends 0.2 0.2 0.7 0.7
------ ------ ------ ------
Total Expenses 38.4 44.8 111.1 131.8
------ ------ ------ ------
Income before tax 6.9 15.6 31.7 82.9
Provision for taxes 1.9 5.2 10.0 27.0
====== ====== ====== ======
Net Income $5.0 $10.4 $21.7 $55.9
====== ====== ====== ======
Income per common share:
Basic $0.21 $0.43 $0.91 $2.34
====== ====== ====== ======
Diluted $0.21 $0.43 $0.91 $2.32
====== ====== ====== ======
Weighted Average Common Shares:
Basic 23,688,252 23,947,899 23,891,340 23,923,593
============ ============ ============ =============
Diluted 23,693,321 24,091,347 23,897,177 24,136,986
============ ============ ============ =============
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Argonaut Group Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In millions except amounts per share) For the Quarter For the Nine Months
(unaudited) Ended September 30, Ended September 30,
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
Net Income $5.0 $10.4 $21.7 $55.9
Other comprehensive income:
Unrealized gain on securities:
Gains arising during the year (33.8) 13.4 (52.5) 44.3
Reclassification adjustment for gains included
in net income (0.9) (7.8) (2.3) (50.1)
------ ------ ------ ------
Other comprehensive income (loss) before tax (34.7) 5.6 (54.8) (5.8)
Income tax expense related to other
Comprehensive income (loss) (12.1) 2.0 (19.2) (2.0)
------ ------ ------ ------
Other comprehensive income (loss), net of tax (22.6) 3.6 (35.6) (3.8)
------ ------ ------ ------
Comprehensive income ($17.6) $14.0 ($13.9) $52.1
====== ====== ====== ======
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ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
(unaudited)
For the Nine Months
Ended September 30,
-------------------------
<S> <C> <C>
1999 1998
Cash flows from operating activities:
Net income $21.7 $55.9
Adjustments to reconcile net income to
net cash provided by operations:
Amortization and depreciation 5.2 6.8
Deferred federal income taxes provision 6.2 20.9
Gains on sales of investments (2.3) (50.1)
Decrease in accrued investment income 5.1 4.7
Decrease (increase) in reinsurance receivables (19.7) 6.7
Decrease (increase) in receivables from insureds (37.0) 13.3
Decrease in accrued retrospective premiums 4.4 5.8
Increase in unearned premiums on ceded reinsurance (0.2) (0.2)
Decrease in reserves for losses and
loss adjustment expense (18.5) (92.3)
Increase (decrease) in unearned premiums (3.2) 3.7
Increase (decrease) in accrued policyholder dividends (0.4) 1.1
Increase (decrease) in income taxes payable (2.9) 5.6
Decrease in other, net (19.7) (12.7)
------ -------
(83.0) (86.7)
------ -------
Cash flows from investing activities:
Sales of fixed maturity investments 61.0 -
Sales of equity securities 11.6 87.4
Maturities and mandatory calls of fixed maturity investments 56.8 231.8
Purchases of fixed maturity investments (13.9) (305.6)
Purchases of equity securities (14.2) (8.2)
Decrease in short-term investments 7.0 26.3
Decrease (increase) in other, net 1.2 (10.4)
------ ------
109.5 21.3
------ ------
Cash flows from financing activities:
Repurchase of common stock (31.3) -
Payment of cash dividend (29.5) (29.4)
Exercise of stock options 0.7 1.6
------ ------
(60.1) (27.8)
------ ------
Decrease in cash and cash equivalents (11.9) (37.3)
Cash and cash equivalents, beginning of period 24.5 59.0
------- ------
Cash and cash equivalents, end of period 12.6 21.7
======= ======
See accompanying notes
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated balance sheet as of September 30, 1999, and the related
consolidated statements of income for the three and nine month periods ended
September 30, 1999 and 1998 and the statements of cash flows for the nine month
periods ended September 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. Certain prior year balances have been reclassified
to conform to the current year presentation.
Note 2 - Dividends Declared
On October 26, the Company declared a regular quarterly cash dividend of $0.41
per common share. The dividend will be paid on November 23, 1999 to shareholders
of record November 9, 1999.
Note 3 - Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. In May 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133", that amends SFAS No. 133 and defers the
effective date to fiscal years beginning after June 15, 2000. Management of the
Company does not believe the adoption of SFAS No. 133 will have a material
impact on the Company's results of operations or financial position when
adopted.
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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 $5.0 million ($0.21 per diluted
common share) on total revenue of $45.3 million, compared with $10.4 million
($0.43 per diluted common share) on total revenue of $60.4 million for the same
quarter last year. For the nine months ended September 30, 1999, the
consolidated net income was $21.7 million ($0.91 per diluted common share) and
total revenue was $142.8 million, compared with $55.9 million ($2.32 per diluted
common share) and total revenue of $214.7 million for the same period in 1998.
Primarily as a result of lower market value in the investment portfolio at
September 30, 1999, shareholders' equity per share declined to $29.73 per common
share compared with $30.71 at June 30, 1999, and $30.99 at September 30, 1998.
Consolidated operating income after tax was $4.4 million for the quarter ended
September 30, 1999, compared with $5.3 million for the same period last year.
For the nine months ended September 30, 1999, consolidated operating income
after tax was $20.2 million, compared with $23.3 million for the same period
last year. Operating income excludes gains on the sale of investments.
The statutory loss and expense ratios for third quarter of 1999 were 86% and 47%
respectively compared to 77% and 54% for the third quarter of 1998. The
statutory loss and expense ratios for the nine months ended September 30, 1999
were 71% and 50% respectively compared to the September 30, 1998 ratios of 69%
and 50%.
Total revenue includes gains on the sale of investments of $900,000 for the
current quarter, compared with $7.8 million for the third quarter of 1998. For
the nine months ended September 30, 1999, gains on sales of investments were
$2.3 million, compared with $50.1 million for the same period last year. Gains
in the third quarter of 1998 resulted primarily from resolution of class action
litigation related to investment trades in prior years. Other gains in 1998
resulted primarily from the call of Navistar International Series D preferred
stock. The Company cannot anticipate when or if similar gains may occur in the
future.
Both operating revenues and income continue to lag compared with 1998. Workers
compensation, the company's principal line of business, continues to be impacted
by rate decreases in key states and an extremely price-competitive marketplace.
Also, investment income is below the prior year's level, reflecting lower market
yields and the reduction of invested assets as claim reserves from prior periods
are paid out, and as funds have been used to repurchase shares of the Company's
common stock.
During the third quarter of 1999, under its previously announced stock
repurchase program, the Company purchased an additional 918,600 shares, bringing
the total shares repurchased to 6,574,336 out of an aggregate authorization of
8,000,000 shares. As of September 30, 1999, 22,888,150 common shares were
outstanding, compared with 24,077,792 shares as of December 31, 1998.
The Company deeply regrets to report that Dr. Henry E. Singleton, Director and
former Chairman of the Board of Argonaut Group, passed away on August 31, 1999.
Dr. Singleton was the founder of Teledyne, Inc., the parent company of Argonaut
until its spin-off to shareholders in 1986. He served as Chairman of Argonaut
Group until December of 1998, but continued as a member of the Board of
Directors and was the largest shareholder of Argonaut. Dr. Singleton's
outstanding leadership and vision have been very valuable to Argonaut and he
will be missed.
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 as the Company's client server policy
management, policy rating and claims processing systems were 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 the
remaining other systems for Year 2000 compliance, as well as validation of the
above mission-critical systems which have been remediated, tested and migrated
to production. In July 1999, the vendor-upgraded Accounts Payable and General
Ledger systems were successfully rolled out to production and it is management's
opinion that all systems have been date-repaired to Year 2000 compliance. The
Company's Year 2000 Contingency Plan has been put in place as of 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, and
commissions and to purchase new investments.
Management believes that the Company maintains sufficient liquidity to pay
claims and expenses. Management also believes that the Company possesses
adequate capital resources to cover unforeseen events such as reinsurer
insolvencies, inadequate premium rates, or reserve deficiencies.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
Reference is made to Item 3 of the Company's Annual Report to Stockholders on
Form 10-K for the fiscal year ended December 31, 1998.
Item 6. Exhibits and Reports on Form 8-K.
1. Exhibit 27 Financial Data Schedule for September 30, 1999 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)
November 11, 1999
<TABLE> <S> <C>
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<S> <C>
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<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<DEBT-HELD-FOR-SALE> 792
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 404
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1196
<CASH> 13
<RECOVER-REINSURE> 26
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<TOTAL-ASSETS> 1649
<POLICY-LOSSES> 877
<UNEARNED-PREMIUMS> 34
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