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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, 2000
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.)
250 Middlefield Road, Menlo Park 94025
(Address of principal executive offices) (Zip code)
650.858.6600
(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 3, 2000.
Title Outstanding
Common Stock, par value $.10 per share 22,001,173
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ARGONAUT GROUP, INC.
TABLE OF CONTENTS
Page No.
Part I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999..........................3
Consolidated Statements of Operations and Comprehensive Income
Three and six months ended June 30, 2000 and 1999............4
Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999 .....................5
Notes to Condensed Consolidated Financial Statements........6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........8
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings..........................................9
Item 6. Exhibits and Reports on Form 8-K..............................9
Signatures............................................................10
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<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions except per share amounts)
June 30, 2000 Dec 31, 1999
(unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at fair value $714.7 $745.4
(cost: 2000 - $743.9; 1999 - $775.8)
Equity securities, available for sale, at fair value 371.4 427.1
(cost: 2000 - $192.6; 1999 - $202.2)
Short-term investments, available for sale, at fair value 6.9 0.8
Securities in transit 0.4 2.6
---------------- ----------------
---------------- ----------------
1,093.4 1,175.9
Cash and cash equivalents 9.9 31.2
Accrued investment income 15.9 16.2
Receivables:
Due from insureds 97.4 92.8
Due from reinsurance 225.9 218.3
Accrued retrospective premiums 24.7 31.0
Cost in excess of net assets purchased 31.3 32.7
Unearned premiums on ceded reinsurance 1.9 1.2
Accrued policyholder dividends recaptured 0.3 3.0
Deferred Federal income tax asset, net 50.5 10.3
Other assets 12.7 12.5
---------------- ----------------
================ ================
$1,563.9 $1,625.1
================ ================
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss adjustment expenses $934.4 $897.4
Unearned premiums 44.0 43.9
Other liabilities 54.4 55.4
---------------- ----------------
---------------- ----------------
1,032.8 996.7
---------------- ----------------
---------------- ----------------
Shareholders' equity:
Common stock - $.10 par, 35,000,000 shares
authorized, 22,002,131 and 22,359,816 shares
issued and outstanding at June 30, 2000
and December 31, 1999, respectively 2.2 2.2
Additional paid-in capital 95.4 96.8
Retained earnings 336.3 403.0
Net unrealized appreciation on securities 97.2 126.4
---------------- ----------------
---------------- ----------------
531.1 628.4
---------------- ----------------
================ ================
$1,563.9 $1,625.1
================ ================
================ ================
See accompanying notes
</TABLE>
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<TABLE>
<CAPTION>
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>
2000 1999 2000 1999
Premiums and other revenue:
Premiums, net $32.5 $33.6 $60.2 $61.2
Net investment income 15.8 17.3 32.0 34.9
Gains on sales of investments 11.2 0.5 20.1 1.4
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Total revenue 59.5 51.4 112.3 97.5
Expenses:
Losses and loss adjustment expenses 29.6 23.1 140.4 38.8
Underwriting, acquisition, and
insurance expenses 17.5 16.5 34.3 32.0
Amortization of cost in excess of
net assets purchased 0.7 0.7 1.4 1.4
Policyholder dividends 3.2 0.3 3.5 0.5
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Total expenses 51.0 40.6 179.6 72.7
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Income (loss) before tax 8.5 10.8 (67.3) 24.8
Provision (benefit) for taxes 2.9 3.6 (23.9) 8.1
------------ ------------ ------------ -------------
============ ============ ============ =============
Net income (loss) $5.6 $7.2 ($43.4) $16.7
============ ============ ============ =============
============ ============ ============ =============
Income (loss) per common share:
Basic $0.26 $0.30 ($1.94) $0.70
============ ============ ============ =============
============ ============ ============ =============
Diluted $0.26 $0.30 ($1.94) $0.70
============ ============ ============ =============
============ ============ ============ =============
Dividends declared per common share: $0.41 $0.41 $0.82 $0.82
============ ============ ============ =============
============ ============ ============ =============
Weighted average common shares:
Basic 22,121,045 23,934,234 22,328,003 23,994,566
============ ============ ============ =============
============ ============ ============ =============
Diluted 22,121,045 23,940,632 22,328,003 24,001,110
============ ============ ============ =============
============ ============ ============ =============
</TABLE>
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<TABLE>
<CAPTION>
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,
--------------------------- ---------------------------
--------------------------- ---------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net income (loss) $5.6 $7.2 ($43.4) $16.7
Other comprehensive loss:
Unrealized loss on securities:
Gains (losses) arising during the year (10.8) 6.0 (24.8) (18.6)
Reclassification adjustment for gains included
in net income or net (11.2) (0.5) (20.1) (1.4)
loss
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Other comprehensive income (loss) before tax (22.0) 5.5 (44.9) (20.0)
Income tax expense related to other
Comprehensive income (loss) (7.7) 1.9 (15.7) (7.0)
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Other comprehensive income (loss), net of tax (14.3) 3.6 (29.2) (13.0)
------------ ------------ ------------ -------------
============ ============ ============ =============
Comprehensive income (loss) ($8.7) $10.8 ($72.6) $3.7
============ ============ ============ =============
See accompanying notes
</TABLE>
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<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
(unaudited)
For the Six Months
Ended June 30,
--------------------------
--------------------------
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($43.4) $16.7
Adjustments to reconcile net income (loss) to net cash provided (used)
by operations:
Amortization and depreciation 2.6 3.5
Deferred federal income tax provision (benefit) (24.5) 4.7
Gains on sales of investments (20.1) (1.4)
Decrease in accrued investment income 0.3 1.5
Decrease (increase) in receivables from insureds (4.6) 6.5
Increase in reinsurance receivables (7.6) (20.1)
Decrease in accrued retrospective premiums 6.3 3.7
Increase in unearned premiums on ceded reinsurance (0.7) (0.1)
Decrease (increase) in accrued policyholder dividends recaptured 2.7 (0.8)
Increase (decrease) in reserves for losses and
loss adjustment expenses 37.0 (41.0)
Increase (decrease) in unearned premiums 0.1 (5.4)
Increase (decrease) in income taxes payable 7.3 (2.4)
Decrease in other assets and liabilities, net (9.3) (14.1)
-------- --------
-------- --------
(10.5) (65.4)
-------- --------
-------- --------
Cash flows from investing activities:
Sales of fixed maturity investments 23.2 42.4
Maturities and mandatory calls of fixed maturity investments 10.5 40.9
Sales of equity securities 45.8 9.1
Purchases of fixed maturity investments (2.0) (7.4)
Purchases of equity securities (16.3) (10.8)
Decrease (increase) in short-term investments (6.1) (5.8)
Other, net 2.2 1.5
-------- --------
-------- --------
57.3 69.9
-------- --------
-------- --------
Cash flows from financing activities:
Repurchase of common stock (6.4) (8.0)
Payment of cash dividend (18.3) (19.7)
Exercise of stock options - 0.7
-------- --------
-------- --------
(24.7) (27.0)
-------- --------
-------- --------
Decrease in cash and cash equivalents (21.3) (5.8)
Cash and cash equivalents, beginning of period 31.2 24.5
-------- --------
======== ========
Cash and cash equivalents, end of period $9.9 $18.7
======== ========
See accompanying notes
</TABLE>
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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, 2000, and the related consolidated
statements of income for the three and six month periods ended June 30, 2000 and
1999 and the statements of cash flows for the six month periods ended June 30,
2000 and 1999 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.
These unaudited consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes that are included in the
Company's Annual Report to Stockholders on Form 10K for the fiscal year ended
December 31, 1999.
Note 2 - Dividends Declared
On August 2, 2000 the Company declared a regular quarterly cash dividend of
$0.41 per common share payable to shareholders of record on August 15, 2000. The
dividend will be paid on August 29, 2000.
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.
Note 4 - Contingencies: Litigation
Argonaut Insurance Company is a defendant in a case entitled Diamond
Woodworks vs. Argonaut Insurance Company, which is in the Superior Court of
Orange County,California. The case arose out of Argonaut's alleged mishandling
of a workers compensation claim and alleged fraudulent acts towards the
plaintiff. On June 19, 2000 the jury awarded compensatory damages of
approximately $700,000 and punitive damages of $14 million against the Company.
As of the date of this filing the Court has not rendered a judgement on the
jury's verdict. The Company has filed and will file other post verdict and post
judgment motions to overturn or reduce the verdicts. The Company intends to
vigorously pursue an appeal of an adverse final judgement. The Company has
recorded the $700,000 verdict for compensatory damages but has not recorded the
$14 million verdict for punitive damages. Management is currently unable to
estimate the amount (if any) of punitive damages that will be awarded.
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Note 5 - Reserves for Losses and Loss Adjustment Expenses
The following table provides a reconciliation of reserves for direct and
assumed losses and loss adjustment expenses for June 30, 2000 and 1999.
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-----------------------------
<S> <C> <C>
In millions 2000 1999
Reserves for losses and loss
Adjustment expenses at
beginning of year
$897.4 $935.8
Losses and loss adjustment expenses:
Provision for losses and loss
adjustment expenses for claims
occurring in the current year
71.9 59.0
Increase in estimated
losses and loss adjustment expenses
for claims occurring in prior years
86.8 5.3
------------ -------------
158.7 64.3
Losses and loss adjustment
expense payments for claims
occurring during:
Current year
13.6 9.0
Prior years
108.1 96.3
------------ -------------
121.7 105.3
Reserves for losses and loss
adjustment expenses at end of year
$934.4 $894.8
============ =============
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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 $5.6 million ($0.26 per diluted
common share) on total revenue of $59.5 million for the second quarter of 2000,
compared with $7.2 million ($0.30 per diluted common share) on total revenue of
$51.4 million for the same quarter last year. For the six months ended June 30,
2000, the Company recorded a consolidated net loss of $43.4 million ($1.94 per
diluted common share) on total revenue of $112.3 million, compared to a net
income of $16.7 million ($0.70 per diluted common share) on total revenue of
$97.5 million for the same period in 1999.
Consolidated operating loss after tax was $1.7 million for the quarter ended
June 30, 2000, compared to a consolidated net income of $6.9 million for the
same period last year. For the six months ended June 30, 2000, the consolidated
operating loss after tax was $56.5 million, compared to consolidated operating
income of $15.8 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 $11.2 million for the
current quarter, compared with $500,000 for the second quarter of 1999. For the
six months ended June 30, 2000, gains on sales of investments were $20.1
million, compared with $1.4 million for the same period last year.
Workers compensation, the Company's primary line of business, continues to
perform unsatisfactorily as a result of inadequate pricing and escalating loss
costs in the industry. During the first quarter of this year, as a result of the
adverse loss development in California workers compensation the Company recorded
an additional increase to its workers compensation reserves of $85.0 million
(before tax). See complete discussion in the March 31, 2000, Form 10-Q. Rates
are improving, however, in some areas, and, as prices increase, more insureds
and brokers are attracted to the Company's reputation for high quality service.
California, where experience for all carriers has been particularly poor, is
seeing significant price increases. For the six months ended June 30, 2000, net
written premiums have increased 11% over the prior year, despite a planned
reduction of workers compensation exposure in California.
During the second quarter of 2000, under its stock repurchase program announced
in 1989, the Company purchased an additional 155,900 shares, bringing the total
shares repurchased to 7,463,236 out of an aggregate authorization of eight
million shares. As of June 30, 2000, 22,002,131 common shares were outstanding,
compared with 22,359,816 shares as of December 31, 1999.
Shareholders' equity per common share at June 30, 2000 was $24.14,
compared with $24.90 at March 31, 2000, and $28.10 at December 31, 1999.
Market Risk
The primary market risk exposures that result in an impact to the Company's
investment portfolio relates to equity price changes and interest rate changes.
The Company does not have any foreign currency risk, debt or derivative
instruments.
The Company holds a well diversified portfolio of investments in common stock
representing U.S. firms in industries and market segments ranging from small
market capitalization stocks to the Standard & Poors 500 stocks. Equity price
risk is managed primarily through the daily monitoring of funds committed to the
various types securities owned by the Company and by limiting the exposure in
any one investment or type of investment.
The Company's primary exposure to interest rate risk relates to its fixed
maturity investments including redeemable preferred stock. Changes in market
interest rates directly impact the market value of the fixed maturity securities
and preferred stocks
Argonaut adheres to certain specific guidelines to manage its investment
portfolio. The Company invests only in high investment grade bonds ("AAA" rated
U.S. treasury notes and government agencies and "A" or better for municipal
bonds and preferred stocks) with a short horizon (10 year maximum) for treasury
notes, municipal bonds, and government agencies.
Management has assessed these risks and feels that there has been no material
change since December 31, 1999.
Liquidity and Capital Resources
The liquidity requirements of the Company have been met by funds provided from
premiums and investment income as well as sales and maturities of invested
assets. The primary use of funds was to pay claims, policy benefits, operating
expenses, and commissions, to purchase new investments, pay dividends to
shareholders and repurchase shares of its outstanding common stock.
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, 1999 and to Footnote 4 of this
Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K.
1. Exhibit 27, Financial Data Schedule for June 30, 2000, 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/ Mark E. Watson, III
Mark E. Watson, III
President (principal executive
officer)
/s/ James B Halliday
James B Halliday
Vice President and Treasurer
(principal financial and
accounting officer)
August 7, 2000
