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 March 31, 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 May 5, 1999.
Title Outstanding
Common Stock, par value $.10 per share 24,004,976
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ARGONAUT GROUP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION: Page
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets
March 31, 1999 and December 31,
1998................................................3
Consolidated Statements of Income and Comprehensive
Income Three Months Ended, March 31, 1999 and 1998..4
Consolidated Statements of Cash Flows
Three Months Ended, March 31, 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:
First Quarter Ended, March 31, 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)
Mar 31, 99 Dec 31, 98
(unaudited) (audited)
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ASSETS
Investments:
Fixed maturities, available for sale, at fair value $900.1 $942.8
(cost: 1999 - $889.9; 1998 - $915.5)
Equity securities, available for sale, at fair value 401.5 408.5
(cost: 1999 - $198.9; 1998 - $197.4)
Short-term investments 19.4 19.9
Securities in transit 1.6
-------- --------
1,321.0 1,372.8
Cash and cash equivalents 9.5 24.5
Accrued investment income 15.2 18.7
Receivables:
Reinsurance 195.8 196.1
Agents' balances 60.9 63.8
Accrued retrospective premiums 52.6 52.8
Cost in excess of net assets purchased 34.8 35.5
Unearned premiums on ceded reinsurance 0.9 0.9
Other assets 15.3 15.5
--------- --------
$1,706.0 $1,780.6
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss adjustment expenses $856.7 $895.9
Unearned premiums 38.3 36.8
Accrued policyholder dividends (3.4) (2.5)
Deferred Federal income taxes receivable 8.5 14.2
Other liabilities 70.2 81.8
-------- --------
970.3 1,026.2
-------- --------
Shareholders' equity:
Common stock - $.10 par, 35,000,000 shares
authorized, 24,018,248 and 24,077,792 shares
issued and outstanding at March 31, 1999
and December 31, 1998, respectively 2.4 2.4
Additional paid-in capital 103.0 102.9
Retained earnings 492.0 494.1
Net unrealized appreciation on securities 138.3 155.0
------- -------
735.7 754.4
------- -------
$1,706.0 $1,780.6
======== ========
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
(unaudited) Ended March 31,
-----------------------
1999 1998
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Premiums and other revenue:
Premiums, net $27.6 $35.5
Net investment income 17.6 20.3
Gains on sales of investments 0.9 42.2
------- ------
Total Revenue 46.1 98.0
Expenses:
Losses and loss adjustment expenses 15.7 24.2
Underwriting, acquisition, and
insurance expenses 15.5 19.2
Amortization of cost in excess of
net assets purchased 0.7 0.7
Policyholder dividends 0.2 0.2
------- -------
Total Expenses 32.1 44.3
------- -------
Income before tax 14.0 53.7
Provision for taxes 4.5 17.0
------- -------
Net Income $9.5 $36.7
======= =======
Income per common share:
Basic $0.40 $1.54
====== ======
Diluted $0.40 $1.52
====== ======
Dividends declared per common share: $0.41 $0.41
====== ======
Weighted Average Common Shares:
Basic 24,055,569 23,887,688
========== ==========
Diluted 24,062,856 24,183,651
========== ==========
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Argonaut Group Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In millions except amounts per share) For the Quarter
(unaudited) Ended March 31,
------------------------
1999 1998
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Net Income $9.5 $36.7
Other comprehensive income:
Unrealized gain on securities:
Gains (losses) arising during the year (24.6) 21.9
Reclassification adjustment for gains included
in net income (0.9) (42.2)
------ ------
Other comprehensive loss before tax (25.5) (20.3)
Income tax expense related to other
comprehensive loss (8.9) (7.1)
------ ------
Other comprehensive loss, net of tax (16.6) (13.2)
------ ------
Comprehensive income (loss) ($7.1) $23.5
====== ======
See accompanying notes
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ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
(unaudited)
For the Three Months
Ended March 31,
-------------------------
1999 1998
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Cash flows from operating activities:
Net income $9.5 $36.7
Adjustments to reconcile net income to net
cash provided by operations:
Amortization and depreciation 1.8 2.4
Decrease in accrued investment income 3.5 3.0
Decrease in reinsurance receivables 0.3 12.8
Decrease in agents' balances 2.9 4.8
Decrease in accrued retrospective premiums 0.2 0.3
Increase in unearned premiums on ceded reinsurance 0.0 (0.1)
Decrease in deferred federal income taxes 3.2 10.8
Decrease in reserves for losses and
loss adjustment expense (39.2) (34.7)
Increase in unearned premiums 1.5 4.4
Increase (decrease) in accrued policyholder
dividends (0.9) 0.1
Increase in income taxes payable 1.0 7.2
Decrease in other, net (12.8) (8.3)
----- -----
(29.0) 39.4
----- -----
Cash flows from investing activities:
Sales of fixed maturity investments 7.1 0.0
Sales of equity 5.5 31.9
securities
Maturities and mandatory calls of fixed
maturity investments 20.0 57.4
Purchases of fixed maturity investments (2.2) (203.3)
Purchases of equity securities (7.1) (3.7)
Decrease in short-term investments 0.5 58.1
Increase in other, net 1.6 1.6
---- ----
25.4 (58.0)
---- -----
Cash flows from financing activities:
Repurchase of common stock (1.8)
Payment of cash dividend (9.9) (9.8)
Exercise of stock 0.3 0.7
options
---- ----
(11.4) (9.1)
---- ----
Decrease in cash and cash equivalents (15.0) (27.7)
Cash and cash equivalents, beginning of period 24.5 59.0
---- ----
Cash and cash equivalents, end of period $9.5 $31.3
===== =====
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 March 31, 1999, and the related
consolidated statements of income and comprehensive income for the three months
ended March 31, 1999 and 1998 and the statements of cash flows for the three
months ended March 31, 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 April 27, the Company declared a cash dividend of $0.41 per common share
payable to shareholders of record on May 11, 1999. The dividend will be paid
on May 25, 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 $9.5 million ($0.40 per diluted
common share) on total revenue of $46.1 million for the quarter ended March 31,
1999. For the first quarter of 1998, net income was $36.7 million ($1.52 per
diluted common share) on total revenue of $98.0 million. Operating income after
tax was $9.0 million ($0.38 per diluted common share) for the quarter, compared
with $9.3 million ($0.39 per diluted common share) for the same period last
year. Operating income excludes gains on the sale of investments. The current
quarter result was favorably impacted by a pre-tax reserve decrease of $3.2
million related to mandatory assigned risk pools. Shareholders' equity per
common share at March 31, 1999 decreased slightly to $30.63 per common share,
compared with $31.33 at the end of 1998, primarily from a decline in the market
value of the bond portfolio.
Total revenue includes gains on sales of investments of $0.9 million for the
current quarter, compared with gains of $42.2 million for the same period in
1998. The 1998 gains resulted primarily from the call of Navistar International
Series D preferred stock. The Company cannot anticipate when or if similar gains
or losses may occur in the future.
For the first quarter of 1999, earned premium decreased $7.9 million to $27.6
million, compared with $35.5 million in the first quarter of 1998. This decline
in premium revenues is due primarily to three factors: declining rates, severe
price competition, and management actions to non-renew certain unprofitable
accounts and to purchase additional reinsurance protection. Since 1995, while
the Company has added significant new accounts and renewed over 71% of its
existing accounts, there have been rate reductions in workers compensation
premiums of as much as 40-50% in many states across the country, including
significant recent reductions in Texas and Arizona. Severe price competition 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. In
the first quarter of 1999, the impact on earned premium from non-renewals was
approximately $1.2 million. Coverage on certain accounts providing temporary or
leased employees leasing accounts was discontinued in 1998 due to unprofitable
results. This decreased current quarter premium by approximately $2.5 million
compared with the first quarter of 1998. Additionally, the Company paid
approximately $2.2 million for additional reinsurance coverage compared to the
prior year first quarter to take advantage of favorable rates. The Company has
not, however, participated in reinsurance contracts known as "buy-downs", which
may attach to losses as low as $20,000 per occurrence. Argonaut's reinsurance
coverage attaches at a more traditional level of $250,000 per occurrence, and is
purchased from reinsurers with an A.M. Best rating of "A" or higher.
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.
7
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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 client server policy
management, policy rating and claims processing systems have been Year 2000
compliant since April of 1998. These computer systems use a four-position field
to store and process all dates. In addition, it is the opinion of management
that effective September 30, 1998, the Company's mission critical mainframe
legacy systems have been remediated to process dates beyond the Year 2000. The
Company has completed testing its mission critical business processing client
server and mainframe legacy systems, computer hardware, computer infrastructure
systems software and office automation software to assure continuity of service
beyond the Year 2000. During the first 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. The Company is
preparing a contingency plan that includes a designated team to resolve any
unforeseen problems that arise beyond the Year 2000.
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 March 31, 1999 Form 10-Q.
2. During the quarter covered by this report, the Registrant did not file any
reports on Form 8-K.
8
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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)
May 6, 1999
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