<PAGE>
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, 2000
OR
|_| 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 April 24, 2000.
Title Outstanding
Common Stock, par value $.10 per share 22,158,017
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ARGONAUT GROUP, INC.
TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999........................3
Consolidated Statements of Income
Three Months Ended March 31, 2000 and 1999.......4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999.......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, 2000 and 1999.........7
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings.........................................9
Item 4. Submission of Matters to a vote of Security Holders..........9
Item 6. Exhibits and Reports on Form 8-K............................10
Signatures...................................................................11
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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 million except per share amounts)
Mar 31, 2000 Dec 31, 1999
<S> <C> <C>
(unaudited)
ASSETS
Investments:
Fixed maturities, available for sale, at fair value $728.5 $745.4
(cost: 2000 - $759.2; 1999 - $775.8)
Equity securities, available for sale, at fair value 409.2 427.1
(cost: 2000 - $206.9; 1999 - $202.2)
Short-term investments, available for sale, at fair 5.9 0.8
value
Securities in transit 1.7 2.6
---------------- ----------------
---------------- ----------------
1,145.3 1,175.9
Cash and cash equivalents 11.5 31.2
Accrued investment income 12.1 16.2
Receivables:
Due from insureds 94.2 92.8
Due from reinsurance 217.0 218.3
Accrued retrospective premiums 27.3 31.0
Cost in excess of net assets purchased 32.0 32.7
Unearned premiums on ceded reinsurance 1.3 1.2
Accrued policyholder dividends recaptured 3.5 3.0
Deferred Federal income tax asset, net 45.3 10.3
Other assets 13.3 12.5
---------------- ----------------
---------------- ----------------
$1,602.8 $1,625.1
================ ================
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss adjustment expenses $953.3 $897.4
Unearned premiums 46.6 43.9
Other liabilities 51.2 55.4
---------------- ----------------
---------------- ----------------
1,051.1 996.7
---------------- ----------------
---------------- ----------------
Shareholders' equity:
Common stock - $.10 par, 35,000,000 shares authorized, 22,157,875 and
22,359,816 shares issued and outstanding at March 31, 2000
and December 31, 1999, respectively 2.2 2.2
Additional paid-in capital 96.1 96.8
Retained earnings 341.9 403.0
Net unrealized appreciation on securities 111.5 126.4
---------------- ----------------
---------------- ----------------
551.7 628.4
---------------- ----------------
---------------- ----------------
$1,602.8 $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
(unaudited) Ended March 31,
---------------------------
---------------------------
<S> <C> <C>
2000 1999
Premiums and other revenue:
Premiums, net $27.7 $27.6
Net investment income 16.2 17.6
Gains on sales of investments 8.9 0.9
------------ ------------
------------ ------------
Total revenue 52.8 46.1
Expenses:
Losses and loss adjustment expenses 110.8 15.7
Underwriting, acquisition, and
insurance expenses 16.8 15.5
Amortization of cost in excess of
net assets purchased 0.7 0.7
Policyholder dividends 0.3 0.2
------------ ------------
------------ ------------
Total expenses 128.6 32.1
------------ ------------
------------ ------------
Income (loss) before tax (75.8) 14.0
Provision (benefit) for taxes (26.8) 4.5
------------ ------------
------------ ------------
Net income (loss) ($49.0) $9.5
============ ============
============ ============
Income (loss) per common share:
Basic ($2.17) $0.40
============ ============
============ ============
Diluted ($2.17) $0.40
============ ============
============ ============
Dividends declared per common share: $0.41 $0.41
============ ============
============ ============
Weighted average common shares:
Basic 22,537,261 24,055,569
============ ============
============ ============
Diluted 22,537,261 24,062,856
============ ============
============ ============
</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
(unaudited) Ended March 31,
---------------------------
---------------------------
2000 1999
<S> <C> <C>
Net income (loss) ($49.0) $9.5
Other comprehensive loss:
Unrealized loss on securities:
Losses arising during the year (14.0) (24.6)
Reclassification adjustment for gains included
in net income or net (8.9) (0.9)
loss
------------ ------------
------------ ------------
Other comprehensive loss before tax (22.9) (25.5)
Income tax expense related to other
comprehensive loss (8.0) (8.9)
------------ ------------
------------ ------------
Other comprehensive loss, net of tax (14.9) (16.6)
------------ ------------
------------ ------------
Comprehensive loss ($63.9) ($7.1)
============ ============
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 Three Months
Ended March 31,
--------------------------
--------------------------
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($49.0) $9.5
Adjustments to reconcile net income (loss) to net cash provided by
operations:
Amortization and depreciation 1.2 1.8
Deferred federal income tax provision (benefit) (27.0) 3.2
Gains on sales of investments (8.9) (0.9)
Decrease in accrued investment income 4.1 3.5
Decrease (increase) in receivables from insureds (1.4) 2.9
Decrease in reinsurance receivables 1.3 0.3
Decrease in accrued retrospective premiums 3.7 0.2
Increase in unearned premiums on ceded reinsurance
(0.1) -
Increase (decrease) in reserves for losses and
loss adjustment expenses 55.9
(39.2)
Increase in unearned premiums
2.7 1.5
Increase in accrued policyholder dividends
(0.5) (0.9)
Increase in income taxes payable
7.0 1.0
Decrease in other assets and liabilities
(12.3) (12.9)
------------ ------------
------------ ------------
25.7 (39.5)
------------ ------------
------------ ------------
Cash flows from investing activities:
Sales of fixed maturity investments
9.1 7.3
Maturities and mandatory calls of fixed maturity investments
14.5 20.0
Sales of equity securities
10.6 6.2
Purchases of fixed maturity investments
(2.0) (2.2)
Purchases of equity securities
(11.5) (7.1)
Decrease (increase) in short-term investments
(5.1) 0.5
Decrease in other, net
0.9 1.6
------------ ------------
------------ ------------
16.5 26.3
------------ ------------
------------ ------------
Cash flows from financing activities:
Repurchase of common stock
(3.7) (1.8)
Payment of cash dividend
(9.2) (9.9)
Exercise of stock options
- 0.3
------------ ------------
------------ ------------
(12.9) (11.4)
------------ ------------
------------ ------------
Decrease in cash and cash equivalents
(19.7) (15.1)
Cash and cash equivalents, beginning of period
31.2 24.5
------------ ------------
------------ ------------
Cash and cash equivalents, end of period $11.5 $9.4
============ ============
============ ============
See accompanying notes
</TABLE>
<PAGE>
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated balance sheet as of March 31, 2000, and the related
consolidated statements of income for the three month period ended March 31,
2000 and 1999 and the statements of cash flows for the three month period ended
March 31, 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 April 25, 2000 the Company declared a regular quarterly cash dividend of
$0.41 per common share payable to shareholders of record on May 16, 2000. The
dividend will be paid on May 30, 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.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Operating Results
The Company reported a consolidated net loss of $49.0 million ($2.17 per diluted
common share) on total revenue of $52.8 million for the quarter ended March 31,
2000. For the first quarter of 1999, net income was $9.5 million ($0.40 per
diluted common share) on total revenue of $46.1 million. The net operating loss
after tax was $54.8 million ($2.43 per diluted common share) for the quarter,
compared to operating income of $9.0 million ($0.38 per diluted common share)
for the same period last year. Operating income excludes gains on the sale of
investments. Total revenue includes gains on sales of investments of $8.9
million for the current quarter, compared with gains of $0.9 million for the
same period in 1999.
Although the Company sees an improving climate in several areas of the country
for workers compensation (its primary line of business), operating results are
significantly below the first quarter of 1999. This result is primarily due to
continued deterioration in workers' compensation loss experience for prior
years, particularly in California. Recent workers compensation experience in
California has been a problem not only for Argonaut, but for the industry as a
whole. Last year, the California Worker's Compensation Insurance Rating Bureau
estimated that, based on September 30, 1999 data, the California workers'
compensation industry was under-reserved by $3.2 billion. In April, based on
December 31, 1999 data, the Bureau increased their estimate of reserve
inadequacy to $4.7 billion. Argonaut's market share in California is slightly
more than 1%. During the fourth quarter of 1999, it became apparent to the
Company that loss reserves for California workers compensation were
deteriorating. As a result of this deterioration, the Company recorded a pre-tax
increase in workers compensation reserves of $31.7 million for the quarter ended
December 31, 1999, reflecting higher than anticipated loss development for
accident years 1998 and 1999, particularly in California. During the first
quarter of this year, the adverse loss development in California workers
compensation continued beyond that expected by the Company, particularly for
accident year 1999, and upon further actuarial review, the Company recorded an
additional increase to its workers compensation reserves of $85.0 million
(before tax). Based on this analysis, the Company and its actuaries believe the
reserves are adequate and that future development of these losses should not
have a material effect on the Company's financial position or results of
operations. There can be no assurance, however, that future development,
favorable or unfavorable, may not occur.
During the first quarter of 2000, under its previously announced stock
repurchase program, the Company purchased an additional 203,400 shares, bringing
the total shares repurchased to 7,306,336 out of an aggregate authorization of
eight million shares. As of March 31, 2000, 22,157,875 common shares were
outstanding, compared with 22,359,816 shares as of December 31, 1999.
Shareholders' equity per common share at March 31, 2000 is $24.90 per common
share, compared with $28.10 at the end of 1999.
This discussion contains "forward looking statements" which are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The forward-looking statements are based on the Company's current
expectations and beliefs concerning future developments and their potential
effects on the Company. There can be no assurance that actual developments will
be those anticipated by the Company. Actual results may differ materially from
those projected as a result of significant risks and uncertainties, including
non-receipt of the expected payments, changes in interest rates, effect of the
performance of financial markets on investment income and fair values of
investments, development of claims and the effect on loss reserves, accuracy in
projecting loss reserves, the impact of competition and pricing environments,
changes in the demand for the Company's products, the effect of general economic
conditions, adverse state and federal legislation and regulations, developments
relating to existing agreements, heightened competition, changes in pricing
environments, and changes in asset valuations. For a more detailed discussion of
risks and uncertainties, see the Company's public filings made with the
Securities and Exchange Commission. The Company undertakes no obligation to
publicly update any forward-looking statements.
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.
Year 2000
The Company is pleased to report that it has not experienced any significant
systems or other Year 2000 (Y2K) problems at the turn of the millennium. During
the first hours of January 2000, the systems department successfully completed a
turn of century date check out of all systems, applications, connections,
hardware and software. All systems continued to be functional and there were no
crisis shutdowns.
As of the business week starting January 3, 2000 all systems were and continue
to be monitored for any Y2K exceptions. The Company has implemented an extensive
Year 2000 contingency plan that identifies pre-planned courses of action in the
event that Y2K problems interrupt its internal processes or its business
partners' processes. As of mid-1999 all third party vendors and customers had
declared themselves to the Company to be Y2K compliant. As a result there are no
third parties that are currently unable to transact business with the Company
due to Y2K systems problems. The contingency plan continued through the quarter
end of March 31, 2000 and has since been discontinued.
There has been no material change in total project cost for upgrading systems
for Y2K compliance from the approximately $4.4 million previously disclosed. All
costs associated with the project have been expensed as incurred. The
postponement of known systems projects or other capital spending does not appear
to have any material impact on the company's liquidity as the result of the
devotion of company resources to preparing for Y2K compliance.
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, 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.
<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, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on April 25, 2000, the
following individuals were elected to the Board of Directors:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Votes For Percentage of Votes Withheld
shares voted
George A. Roberts 18,602,534 98% 395,819
Michael T. Gray 18,616,210 98% 382,143
Jerrold V. Jerome 18,601,074 98% 397,279
Judith R. Nelson 18,794,175 99% 204,178
John R. Power, Jr. 18,761,829 99% 236,524
Fayez S. Sarofim 18,516,082 97% 482,271
Mark E. Watson, III 18,600,810 98% 397,543
Gary V. Woods 18,761,569 99% 236,784
</TABLE>
<TABLE>
<CAPTION>
The following proposals were approved at the Company's Annual Meeting:
Affirmative Percentage of Negative Votes
Votes shares voted Votes Withheld
<S> <C> <C> <C> <C>
1. To increase the number
of shares of common stock
available for issuance under
the Company's Stock Option
Plan from 2,000,000 to
2,500,000. 16,474,781 87% 2,328,584 194,988
2. To adopt the Company's Non-
Employee Director Stock
Option Plan. 17,500,946 92% 1,068,018 429,389
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
1. Exhibit 27 Financial Data Schedule for March 31, 2000 Form 10-Q.
2. During the quarter covered by this report, the Registrant did not file
any reports on Form 8-K.
<PAGE>
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)
May 3, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-01-2000
<PERIOD-END> Mar-31-2000
<DEBT-HELD-FOR-SALE> 729
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 409
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1145
<CASH> 12
<RECOVER-REINSURE> 27
<DEFERRED-ACQUISITION> 4
<TOTAL-ASSETS> 1603
<POLICY-LOSSES> 953
<UNEARNED-PREMIUMS> 47
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 3
<NOTES-PAYABLE> 0
2
0
<COMMON> 2
<OTHER-SE> 552
<TOTAL-LIABILITY-AND-EQUITY> 1603
21
<INVESTMENT-INCOME> 16
<INVESTMENT-GAINS> 9
<OTHER-INCOME> 0
<BENEFITS> 111
<UNDERWRITING-AMORTIZATION> 1
<UNDERWRITING-OTHER> 17
<INCOME-PRETAX> (76)
<INCOME-TAX> (27)
<INCOME-CONTINUING> (100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49)
<EPS-BASIC> (2)
<EPS-DILUTED> (2)
<RESERVE-OPEN> 706
<PROVISION-CURRENT> 30
<PROVISION-PRIOR> 82
<PAYMENTS-CURRENT> 4
<PAYMENTS-PRIOR> 51
<RESERVE-CLOSE> 764
<CUMULATIVE-DEFICIENCY> 101
</TABLE>
