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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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, California 94025-3500
(Address of principal executive offices) (Zip code)
(650) 858-6600
(Registrant's telephone number including area code)
Securities registered pursuant to section
12(g) of the Act:
Title of Securities
Common Stock, par value of $.10 per share
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
As of March 20, 2000, registrant had 22,157,756 shares of Common Stock
outstanding, and the aggregate market value of the voting stock held by
nonaffiliates was approximately $414.1 million.
DOCUMENTS INCORPORATED BY REFERENCE
Part II: Excerpts from Argonaut Group, Inc.'s Annual Report to Shareholders for
the Year Ended December 31, 1999.
Part III: Excerpts from Argonaut Group, Inc.'s
Proxy Statement for the Annual Meeting of Shareholders to be held on April 25,
2000.
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Argonaut Group, Inc.
Annual Report on Form 10-K
For the Year Ended December 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related 13
Stockholder Matters
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of 13
Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Ris 14
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants on 15
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management 16
Item 13. Certain Relationships and Related Transactions 16
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 16
</TABLE>
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PART I
Item 1. Business
Introduction
Argonaut Group, Inc. ("Argonaut Group") is a national provider of specialty
insurance products focused on high quality customer service for specific niches
of property-casualty insurance. Workers compensation accounted for 86% of
premiums in 1999 before the adjustment to the retro premium accrual of $20.0
million. The information regarding the retro premium accrual adjustment is set
forth under the caption "Management's Discussion and Analysis of Results of
Operations and Financial Condition - Results of Operations" in the Annual Report
to Shareholders of Argonaut Group for the fiscal year ended December 31, 1999,
and is incorporated herein by reference. See Exhibit Index. See "Item 6.
Selected Financial Data" for certain financial information regarding industry
segments in which the Company operates. Argonaut Group is incorporated in
Delaware. Argonaut Group's executive offices are located at 250 Middlefield
Road, Menlo Park, California 94025-3500, telephone 650.858.6600. The term "the
Company" refers to Argonaut Group and all its subsidiaries.
Argonaut Insurance Company ("Argonaut Insurance"), Argonaut Group's principal
insurance subsidiary, was established in California in 1948. Workers
compensation is the primary line of insurance written by Argonaut Insurance and
its subsidiaries: Argonaut-Midwest Insurance Company, Argonaut-Northwest
Insurance Company, Argonaut-Southwest Insurance Company, and Georgia Insurance
Company. Argonaut Insurance and these subsidiaries also write complementary
lines of commercial insurance for a small number of their clients, primarily
consisting of general and automobile liability, but generally targets companies
whose workers compensation needs will result in significant annual premiums
(generally between $250,000 and $5 million) in classes of insurance which
require specific expertise to underwrite prudently, enhance the safety of the
workplace, and effectively manage losses through partnership with the insured.
Argonaut Great Central Insurance Company ("Argonaut Great Central") is Argonaut
Group's other insurance subsidiary. Established in Illinois in 1948 and
purchased by Argonaut Insurance Company in 1971, Argonaut Great Central
specializes in providing package insurance policies including property, general
liability, workers compensation, and umbrella coverage for certain classes of
insureds. Argonaut Insurance is Argonaut Great Central's immediate parent.
AGI Properties, Inc. ("AGI Properties"), a non-insurance company, owns and
leases certain real properties. AGI Properties was incorporated in California in
1970. Argonaut Insurance is AGI Properties' immediate parent.
Products
The Company has two primary product lines: workers compensation insurance
and other property-casualty insurance. Incorporated herein by reference
is the information appearing as "Note 10 - Business Segments" in the Notes
to the Consolidated Financial Statements of the Annual Report.
See Exhibit Index.
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Workers Compensation
Workers compensation insurance is a statutory system which provides for
compensation of a policyholder's employees and their dependents for injuries
(other than self-inflicted wounds) arising out of or suffered in the course of
the employee's employment, even though the injuries may have resulted from the
negligence or wrongful conduct of the employee himself or any other person.
Workers compensation insurance is sold primarily by Argonaut Insurance and its
subsidiaries. Net earned premiums for this line of business were $85.7 million
in 1999 (before adjustment to the retro premium accrual), and $115.6 million,
and $140.6 million, in 1998, and 1997, respectively.
Other Property-Casualty Insurance
This product includes general and automobile liability, commercial
multiple-peril, and various other insurance coverages. Premiums for these
product lines were $27.3 million, $22.9 million, and $24.3 million, in 1999,
1998, and 1997, respectively.
Argonaut Insurance offers general and automobile liability and other insurance
to commercial clients in conjunction with workers compensation insurance.
Liability insurance compensates third parties for damages resulting from the
actions of the insured.
Commercial multiple-peril insurance, one of Argonaut Great Central's primary
products, is a composite product designed for the small-to-medium sized business
which needs basic insurance coverage and simple insurance administration.
Commercial multiple-peril policies generally cover property, plant, inventory,
general liability, and associated coverages.
Ceded Reinsurance
The Company's policy regarding reinsurance is based upon the capitalization of
the subsidiaries. The goal is to limit the exposure to surplus from losses
resulting from catastrophes and large or unusually hazardous risks.
As is the case with direct premiums written, cessions on reinsurance contracts
are recognized ratably over the period to which the premium relates.
As a result of an increase in prices in the reinsurance market, Argonaut
Insurance increased the limit of retention on its primary excess of loss
reinsurance treaty from $250,000 to $1,000,000 effective July 1, 1999. Its limit
of retention is $250,000 on its wrap up treaty. Argonaut Great Central's limit
of retention remains the same as the prior year at $500,000 on the property and
liability treaty, $300,000 on the First Workers' Compensation Excess of Loss
Reinsurance Treaty and $250,000 on the First Underlying Excess of Loss
Reinsurance Treaty.
Incorporated herein by reference is the information appearing as "Note 3 -
Reinsurance" in the Notes to the Consolidated Financial Statements of the Annual
Report. See Exhibit Index.
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Competition
The property-casualty insurance industry is characterized by a large number of
competing companies and modest market shares by industry participants. According
to A.M. Best, a leading insurance industry rating and analysis firm, as of
December 31, 1998, there are about 2,500 property-casualty insurance companies
operating in the United States, with the 100 largest companies (groups and
unaffiliated) writing about 80% of the industry's premiums. Industry wide, net
premiums earned totaled approximately 280 billion for 1998. Workers'
Compensation earned was $25.4 billion or about 9.0% of all premiums earned.
(A.M. Best 1999 data is not available yet.)
The Company's principal competitors cannot be easily classified. The Company's
principal lines of business are written by numerous insurance companies.
Competition for any one account may come from a very large national firm or a
smaller regional company selling either directly or through agents and brokers.
For the Company's principal line of business, workers compensation, additional
competition comes from state workers compensation funds.
Regulation
Since, 1994, the Company's insurance subsidiaries have been subject to the
Risk-Based Capital (RBC) for Insurers Model Act. The RBC calculation takes into
account: (1) asset risk, (2) credit risk, (3) underwriting risk, and (4) all
other relevant risks. The RBC for Insurers Model Act provides for four levels of
regulatory authority: (1) Company Action Level Event, (2) Regulatory Action
Level Event, (3) Authorized Control Level Event, and (4) Mandatory Control Level
Event. These four levels of authority provide for increasing regulatory remedies
for companies that fail to comply with the RBC for Insurers Model Act.
As of December 31, 1999, calculations show that the Company's insurance
subsidiaries' RBC coverage far exceeds the minimum required.
The Company's insurance subsidiaries are members of the statutorily created
insolvency guarantee associations in all states where they are authorized to
transact business. These associations were formed for the purpose of paying
claims of insolvent companies. The Company is assessed its pro rata share of
such claims based upon its premium writings, subject to a maximum annual
assessment per line of insurance. Such costs can generally be recovered through
surcharges on future premiums. The Company does not believe that assessments on
current insolvencies will have a material effect on its financial condition or
results of operations.
The Company has no policyholder dividend restrictions.
Under the provisions of the California Insurance Code, there is a maximum amount
of shareholder dividends which can be paid without prior approval of the
Insurance Commissioner. Under these provisions, as of December 31, 1999,
Argonaut Insurance could pay to Argonaut Group a maximum dividend of $633,000
without the Insurance Commissioner's approval.
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Marketing
Argonaut Insurance and Argonaut Great Central operate in substantially different
markets.
Incorporated herein by reference is the information appearing as "Note 1 -
Business and Significant Accounting Policies" in the Notes to the Consolidated
Financial Statements of the Annual Report. See Exhibit Index.
Argonaut Insurance Company is authorized to operate in all 50 states. Its
primary line of business, workers compensation insurance, accounts for 93% of
its total premiums (before adjustment to the retro premium accrual). These
policies are primarily written on a retrospective rating basis, with large
deductible provisions, or guaranteed cost basis. For retrospectively rated
policies, Argonaut Insurance's risk regarding inadequate price levels is
mitigated to a certain extent as the insured will have to pay additional
premiums (or will be refunded premiums) based upon their actual loss experience.
Argonaut Great Central is authorized to operate in 33 states and considers
itself to be a specialty company with a defined target market. Argonaut Great
Central's dominant products are commercial multiple-peril and workers
compensation insurance. Argonaut Great Central's policies are marketed through
agents.
Neither Argonaut Insurance nor Argonaut Great Central market any of their
policies through managing general agents.
Run Off Lines
Incorporated herein by reference is the information appearing as "Note 12 - Run
Off Lines" in the Notes to the Consolidated Financial Statements of the Annual
Report. See Exhibit Index.
Loss ratios for the run off line of business are not meaningful as there are no
current year premiums associated with the current year losses on this line of
business.
Investments
The Company's investment portfolio continues to emphasize high quality fixed
income and equity investments. As a percentage of the total investment
portfolio, U.S. Treasury securities comprise the largest portion of the
Company's holdings. Obligations of states and political subdivisions have
dramatically decreased from 1998 as a result of maturities and sales. The
proceeds from these maturities and sales were reinvested in high quality
preferred and common stocks and Other U.S. Agencies (FNMA and FHLM).
The Company's investment policy is to invest only in securities issued by
investment-grade issuers. It does not invest in high-yield or so called "junk
bonds," derivatives, speculative real estate, or mortgage backed securities.
Incorporated herein by reference is the information appearing as "Note 2 -
Investments" and "Note 7 - Net Investment Income" in the Notes to the
Consolidated Financial Statements of the Annual Report. See Exhibit Index.
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Reserves for Losses and Loss Adjustment Expenses
Incorporated herein by reference is the information set forth under the caption
"Management's Discussion and Analysis of Results of Operations and Financial
Condition-Results of Operations" in the Annual Report to Shareholders of
Argonaut Group for the fiscal year ended December 31, 1999 and in "Note 4 -
Reserves for Losses and Loss Adjustment Expenses" in the Notes to the
Consolidated Financial Statements of the Annual Report. See Exhibit Index.
During the fourth quarter of 1999, the Company increased workers compensation
loss reserves by $31.7 million, reflecting higher than anticipated loss
development for accident years 1998 and 1999, particularly in California.
Preliminary indications in the first quarter of 2000 show continued adverse
development of these accident years. If these trends continue, additional
strengthening of these reserves will be required.
Reserves for environmental claims were $91.3 million and $96.3 million at
December 31, 1999 and 1998, respectively. Reserves for asbestos claims were
$75.3 and $76.6 million at December 31, 1999 and 1998.
In the opinion of management, the Company's reserves for each of these liability
issues represent the Company's best estimate of its ultimate liabilities, based
on currently known facts, current law, current technology, and assumptions
considered reasonable where facts are not known. Due to significant
uncertainties and related management judgments, however, there can be no
assurance that future loss development, favorable or unfavorable, can be
accurately predicted.
The following tables on page 8 and 9 indicate the manner in which reserves for
losses and loss adjustment expenses at the end of a particular year change as
time passes. The first table (Table I) presented is net of the effects of
reinsurance. The second table (Table II) presented includes only amounts related
to direct insurance.
The first line shows the reserves as originally reported at the end of the
stated year. The second section shows the cumulative amounts paid as of the end
of successive years related to those reserves. The third section shows the
original recorded reserves as of the end of successive years adjusted to reflect
facts and circumstances later discovered. The last line, cumulative deficiency
or redundancy, compares the adjusted reserves to the reserves as originally
established and shows that the reserves as originally recorded were either
inadequate or excessive to cover the estimated cost of claims as of December 31,
1999.
Conditions and trends that have affected the development of these reserves in
the past will not necessarily recur in the future. It would not be appropriate
to use this cumulative history in the projection of future performance.
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Table I
Analysis of Losses and Loss Adjustment Expenses (LAE) Development (in millions)
(Net of Reinsurance)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for Losses
and LAE (a) $1,348.5 $1,287.8 $1,201.9 $1,107.6 $1,011.4 $892.9 $985.8 $845.7 $723.3 $706.5
Cumulative Amount
Paid as of: (b)
One year later 313.1 307.3 276.9 259.9 239.7 214.2 179.0 172.7 149.8
Two years later 537.5 525.8 489.2 444.7 417.9 356.2 309.7 278.7
Three years later 698.5 697.6 638.9 588.8 531.5 468.6 392.7
Four years later 835.7 821.4 759.5 684.1 623.9 537.9
Five years later 940.1 919.5 839.9 758.5 682.9
Six years later 1,021.3 991.0 906.8 814.8
Seven years later 1,082.7 1,051.3 962.7
Eight years later 1,134.2 1,106.0
Nine years later 1,182.6
Reserves Re-estimated
As of:
One year later 1,358.3 1,285.2 1,197.1 1,086.8 996.5 1,073.6 934.0 819.2 785.4
Two years later 1,356.9 1,311.9 1,202.0 1,083.0 1,180.8 1,038.9 895.5 851.1
Three years later 1,381.9 1,315.9 1,203.0 1,283.4 1,159.2 1,014.1 916.0
Four years later 1,374.1 1,325.9 1,403.1 1,277.3 1,152.5 1,033.8
Five years later 1,384.9 1,514.9 1,400.6 1,268.2 1,154.6
Six years later 1,572.0 1,524.3 1,396.2 1,262.2
Seven years later 1,575.6 1,518.8 1,391.3
Eight years later 1,572.8 1,516.7
Nine years later 1,570.9
Cumulative (Deficiency)
Redundancy: (c) ($222.4) ($228.9) ($189.4) ($154.6) ($143.2) ($140.9) $69.8 ($5.4) ($62.1)
</TABLE>
(a) Reserves for losses and LAE, net of reserves for reinsurance.
(b) Cumulative amount paid, net of reinsurance payments.
(c) Represents changes of net reserves between the original estimate
(for each accident year) of the indicated year and the reserve
re-estimated as of the end of the current year. Re-estimated reserves
are calculated by adding cumulative amount paid to unpaid loss and LAE
and incurred but not reported (IBNR) at year end for each accident
year.
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Table II
Analysis of Losses and Loss Adjustment Expenses (LAE) Development (in millions)
(Direct Insurance Only)
<TABLE>
<CAPTION>
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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for Losses
and LAE (a) $1,561.8 $1,494.4 $1,390.9 $1,284.1 $1,196.3 $1,060.9 $1,193.7 $1,024.9 $895.9 $897.4
Cumulative Amount
Paid as of: (b)
One year later 384.7 355.7 325.6 288.3 267.5 245.2 234.7 197.0 177.8
Two years later 656.2 621.6 564.4 499.3 474.8 437.8 389.3 329.6
Three years later 862.6 818.2 739.3 668.9 625.4 572.1 498.5
Four years later 1,023.5 965.1 884.2 787.9 737.5 665.5
Five years later 1,149.2 1,086.1 983.5 881.4 817.9
Six years later 1,252.8 1,174.5 1,069.3 951.1
Seven years later 1,327.6 1,253.6 1,134.2
Eight years later 1,396.5 1,314.3
Nine years later 1,450.8
Reserves Re-estimated
as of:
One year later 1,619.3 1,512.6 1,414.2 1,291.7 1,179.7 1,300.3 1,159.7 1,006.2 990.1
Two years later 1,645.8 1,570.2 1,448.8 1,278.8 1,423.1 1,282.8 1,134.3 1,069.7
Three years later 1,702.3 1,603.7 1,440.6 1,533.8 1,404.1 1,267.2 1,182.5
Four years later 1,719.7 1,604.2 1,694.5 1,526.6 1,412.1 1,317.3
Five years later 1,723.6 1,841.5 1,687.5 1,532.5 1,440.9
Six years later 1,956.8 1,850.4 1,698.0 1,546.4
Seven years later 1,958.8 1,859.5 1,708.6
Eight years later 1,970.0 1,869.4
Nine years later 1,980.8
Cumulative (Deficiency)
Redundancy: (c) ($419.0) ($375.0) ($317.7) ($262.3) ($244.6) ($256.4) $11.2 ($44.8) ($94.2)
</TABLE>
(a) Reserves for losses and LAE, excluding effects of reinsurance.
(b) Cumulative amount paid, excluding effects of reinsurance.
(c) Represents changes of direct reserves between the original estimate
(for each accident year) of the indicated year and the reserve
re-estimated as of the end of the current year. Re-estimated reserves
are calculated by adding cumulative amount paid to unpaid loss and LAE
and incurred but not reported (IBNR) at year end for each accident
year.
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Capital Adequacy
Several measures of capital adequacy are common in the property-casualty
industry. The two most often used are (a) premium-to-surplus (which measures
pressures on capital from inadequate pricing) and, (b) reserves-to-surplus
(which measures pressures on capital from inadequate loss and loss adjustment
expense reserves).
The following table shows the consolidated premium-to-surplus and
reserves-to-surplus ratios of the Company's insurance subsidiaries (on a
statutory basis).
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Ratio of:
Premium-to-surplus 0.2 0.2 0.3
=== === ===
Reserves-to-surplus 1.2 1.1 1.5
=== === ===
</TABLE>
The Company believes that its 1999 capital ratios are satisfactory.
Ratings
The Company's insurance subsidiaries are rated by A.M. Best. A.M. Best is
generally considered to be the leading insurance rating agency, and its ratings
are used by insurance buyers, agents and brokers, and other insurance companies
as an indicator of financial strength and security, and are not intended to
reflect the quality of the rated company for investment purposes. Argonaut
Insurance and its pooled subsidiaries has carried an "A+" (Superior) rating
since 1991. Argonaut Great Central is rated separately and carries an "A-"
(Excellent) rating.
Standard & Poor's currently rates the claims-paying ability of Argonaut
Insurance and its pooled subsidiaries as "AA-" and Argonaut Great Central as
"A".
Employees
At December 31, 1999, the Company employed 372 full-time employees. Of this
total, Argonaut Insurance employed 288 people (251 professional/managerial and
37 clerical/operational). Argonaut Great Central employed 70 people (44
professional/managerial and 26 clerical/operational). Argonaut Group employed 14
people (13 professional/managerial and 1 clerical/operational). The Company is
not a party to any collective bargaining agreements.
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Item 2. Properties
Argonaut Insurance's headquarters are located in a facility that consists of an
office building on approximately two acres of land in Menlo Park, California.
Argonaut Great Central's headquarters are located in a facility in Peoria,
Illinois. Argonaut Insurance and Argonaut Great Central own the buildings in
which their headquarters are located. In addition, the Company has entered into
short term leases in conjunction with its operations at various locations
throughout the country. The Company believes that its properties are adequate
for its present needs.
Item 3. Legal Proceedings
On August 30, 1996, the Los Angeles County Metropolitan Transportation Authority
(MTA) filed a civil action against Argonaut Insurance alleging breach of
contract, breach of the covenant of good faith and fair dealing, and requesting
ancillary relief in the form of an accounting, an injunction and restitution in
connection with allegations regarding failures to perform under certain
contracts of insurance.
Argonaut Insurance responded to the complaint, and brought certain counterclaims
against the MTA, and possibly others, in connection with the facts underlying
the lawsuit. Argonaut Insurance believes it has meritorious defenses, and
intends to vigorously contest these claims. Argonaut Insurance is unable, with
any degree of certainty, to comment upon the range of any potential loss, or
whether such an outcome is probable or remote, in light of the limited discovery
conducted in the case, and the investigation conducted thus far.
The Company has been sued in fifteen referenced lawsuits brought on behalf of
alleged classes of purchasers of retrospectively rated worker's compensation
insurance, alleging that the defendants, including other compensation
insurers, charged the purported class unlawful premiums. The lawsuits are
Bristol Hotel Asset Company, et al.; v. The Aetna Casualty and Surety
Company, et al.; Civil Action No. 97-92-I, pending in the Chancery Court for
Davidson County, Tennessee, filed on January 8, 1997; El Chico Restaurants,
Inc. v. The Aetna Casualty and Surety Company, et al.; Civil Action File No.
97-RCCV-28, pending in the Superior Court of Richmond County, Georgia, filed
on January 10, 1997; Bristol Hotel Management Corp., et al. v. Aetna Casualty &
Surety Co. A/K/A Aetna Group, et al.; Civil Action No. CL 9700727A, pending in
the Circuit Court of the Fifteenth Judicial Circuit, in and for Palm Beach
County, Florida, filed on March 18, 1997; Bristol Hotel Management Corp.,
et al. v. Aetna Casualty & Surety Co. A/K/A Aetna Group, et al.; Civil Action
No. 97-2240, pending in the United States District Court for the Southern
District of Florida, Miami Division, filed on July 17, 1997; Foodarama
Supermarkets, Inc. et al.; v. Aetna Casualty & Surety Co., et al.; Docket No.
L-3556-97, pending in the Superior Court of New Jersey Law Division, Morris
County, filed on November 17, 1997; CR/PL Management Co., et al. v. Allianz
Insurance Company, et al.; Civil Action No. 98-01635; pending in the Circuit
Court of Cook County, Illinois County Department,
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Chancery Division, filed February 6, 1998; American Freightways, Inc.
et al.; v. The American Insurance Company, et al.; Case No.982-00338; pending
in the Circuit Court of the City of St. Louis, State of Missouri, filed on
February 17, 1998; Foodrama Supermarkets, Inc., et al. v. The American
Insurance Company, et al.; Civil Action No. 001138; pending in the Court of
Common Pleas, Philadelphia County, Civil Division, filed on April 8, 1998;
Sandwich Chef of Texas, Inc., et al. v. Reliance National Indemnity
Insurance Company, et al., Case No. 98-01631; In the District Court of Harris
County, Texas, 295th Judicial District, was filed on May 6, 1998; AARP, et
al. v. National Surety Corp., et al., No. 98-820589-CZ; Wayne County Circuit
Court, State of Michigan, was filed on June 30, 1998; Alumax, Inc., et al.
v. Allianz Insurance Company, et al., Case No. CV98032222; In the Circuit
Court of Jefferson County, Alabama, was filed on May 21, 1998; Burnham Service
Corp., et al. v. NCCI, Inc., et al., Case No. 9800321; Supreme Court of the
State of New York, County of New York, was filed on June 30, 1998; FFE
Transportation Services, Inc., et al. v. NCCI, et al., Case No. 98-RCCV-509;
Superior Court of Richmond County, State of Georgia, was filed on June 11, 1998;
Payless Cashways, Inc., et al. v. National Surety Corp., et al., Case No.
9812388; Fayette Circuit Court, Division 1, Commonwealth of Kentucky, was
filed on June 30, 1998; and Albany International Corp., et al. v. American
National Fire Insurance Co., et al., Case No. CV98-11695; Superior Court of the
State of Arizona, County of Maricopa, was filed on June 26, 1998.
The Company intends to vigorously defend these lawsuits. Management is unable to
determine the potential financial impact of these lawsuits at this time.
The insurance subsidiaries of the Company are parties to other various legal
proceedings which are considered routine and incidental to their business and
are not material to the Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Argonaut Group's security holders during
the last quarter of its fiscal year ended December 31, 1999.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
The Company's common stock trades on the NASDAQ Stock Market under the symbol
AGII. The closing price on March 20, 2000 was $18.69 per share. The information
on high and low common stock prices set forth under the caption "Common Stock
Market Prices" in the Annual Report to Shareholders of Argonaut Group for the
fiscal year ended December 31, 1999, is incorporated herein by reference. See
Exhibit Index.
Holders of Common Stock
The number of holders of record of the Company's Common Stock as of February 25,
2000 was 6,985.
Dividends
The information set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition - Liquidity and
Capital Resources" in the Annual Report to Shareholders of Argonaut Group for
the fiscal year ended December 31, 1999 and in "Note 6 - Shareholders' Equity"
in the Notes to the Consolidated Financial Statements of the Annual Report, is
incorporated herein by reference. See Exhibit Index.
Item 6. Selected Financial Data
The information set forth under the caption "Selected Financial Data" in the
Annual Report to Shareholders of Argonaut Group for the fiscal year ended
December 31, 1999, is incorporated herein by reference. See Exhibit Index.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" in the Annual Report
to Shareholders of Argonaut Group for the fiscal year ended December 31, 1999,
is incorporated herein by reference. See Exhibit Index.
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.
Page 13
14
<PAGE>
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 will continue through the
quarter end of March 2000.
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.
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.
Item 7A. Quantitative and Qualitative Disclosures about 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. At December 31, 1999 the fair market
value of the Company's common stock was $427.1 million. The potential loss in
fair value at December 31, 1999 using a 10% hypothetical decline in prices, is
estimated to be approximately $42.7 million.
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. The following interest rate sensitivity analysis measures
the potential change in fair value for the Company's fixed maturity investments
and preferred stock as of December 31, 1999 resulting from changes in the rate
of 100 and 200 basis points.
Page 14
15
<PAGE>
Interest Rate Sensitivity Analysis
Yield Modified
Fair Value To Duration
(Millions) Maturity (Years)
----- ---- ---
- -200bp 867.3 5.5% 6.4
- -100bp 871.8 6.1% 6.3
Base Case 806.7 7.1% 6.1
+100bp 761.3 8.1% 5.7
+200bp 717.1 9.1% 5.5
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.
Item 8. Financial Statements and Supplementary Data
The Report of Independent Public Accountants and consolidated financial
statements and related notes of Argonaut Group, Inc. and subsidiaries listed on
the index to financial statements set forth in Item 14(a)1 of this Form 10-K
Report are incorporated herein by reference to the Annual Report to Shareholders
of Argonaut Group for the fiscal year ended December 31, 1999.
The Company does not identify each asset with any one line of business and any
such allocation would be arbitrary.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Page 15
16
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated herein by reference is the information appearing under the captions
"Election of Directors", "Executive Officers," "Security Ownership of Principal
Shareholders and Management" , and Section 16(a) Beneficial Ownership Reporting
Compliance in the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission relating to the registrant's Annual Meeting of
Shareholders to be held on April 25, 2000.
Item 11. Executive Compensation
Incorporated herein by reference is the information appearing under the captions
"Compensation of Executive Officers", "Indemnity Agreements", "Pension Plan",
and "Compensation of Directors" in the registrant's Proxy Statement to be filed
with the Securities and Exchange Commission relating to the registrant's Annual
Meeting of Shareholders to be held on April 25, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference is the information appearing under the caption
"Security Ownership of Principal Shareholders and Management" in the
registrant's Proxy Statement to be filed with the Securities and Exchange
Commission relating to the registrant's Annual Meeting of Shareholders to be
held on April 25, 2000.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference is the information appearing under the caption
"Compensation and Stock Option Committee Interlocks and Insider Participation"
in the registrant's Proxy Statement to be filed with the Securities and Exchange
Commission relating to the registrant's Annual Meeting of Shareholders to be
held on April 25, 2000.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)1. Financial Statements
Selected Financial Data
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 1999 and 1998
Page 16
17
<PAGE>
Consolidated Statements of Operations
For the Years Ended December 31, 1999, 1998, and 1997
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 1999, 1998, and 1997
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flow
For the Years Ended December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
Quarterly Financial Data (Unaudited)
Common Stock Market Prices (Unaudited)
Management's Discussion and Analysis of Results of Operations and
Financial Condition
(a)2. Financial Statement Schedules
Report of Independent Public Accountants on Schedules
Schedule I - Condensed Financial Information of Registrant
December 31, 1999 and 1998
Schedule V - Supplementary Insurance Information December 31,
1999, 1998, and 1997
All other schedules and notes specified under Regulation S-X are omitted because
they are either not applicable, not required, or the information called for
therein appears in response to the items of Form 10-K or in the financial
statements or notes thereto.
(a)3. Exhibits
The following exhibits are numbered in accordance with Item 601 of Regulation
S-K and, except as noted, are filed herewith.
2. Information Statement of Registrant (incorporated by reference to the
Exhibit 2 to the Registrant's Form 10 Registration Statement dated
September 3, 1986, filed with the Securities and Exchange Commission on
September 4, 1986).
3.1 Certificate of Incorporation of Registrant (incorporated by reference
to the Exhibit 3.1 to the Registrant's Form 10 Registration Statement
dated September 3, 1986, filed with the Securities and Exchange
Commission on September 4, 1986).
Page 17
18
<PAGE>
3.2 Bylaws of the Registrant (incorporated by reference to the Exhibit 3.2
to the Registrant's Form 10 Registration Statement dated September 3,
1986, filed with the Securities and Exchange Commission on September 4,
1986).
10.1 Argonaut Group, Inc. 1986 Stock Option Plan (incorporated by
reference to the Exhibit 10.1 to the Registrant's Form 10
Registration Statement dated September 3, 1986, filed with the
Securities and Exchange Commission on September 4, 1986).
10.2 Argonaut Group, Inc. Retirement Plan (incorporated by reference to the
Exhibit 10.2 to the Registrant's Form 10 Registration Statement dated
September 3, 1986, filed with the Securities and Exchange Commission on
September 4, 1986).
10.3 Tax Agreement by and among Registrant and its subsidiaries and
Teledyne, Inc. (incorporated by reference to the Exhibit 10.3 to the
Registrant's Form 10 Registration Statement dated September 3, 1986,
filed with the Securities and Exchange Commission on September 4,
1986).
10.4 Argonaut Group, Inc. 1986 Stock Option Plan, as amended (incorporated
by reference to the Exhibit 4.3 to the Registrant's Registration
Statement on Form S-8 filed with the Securities and Exchange Commission
on February 13, 1987).
10.5 401(k) Retirement Savings Plan (incorporated by reference to the
Exhibit 10.4 to the Registrant's Form 10-K filed with the Securities
and Exchange Commission on February 28, 1989).
10.6 Employee Stock Investment Plan (incorporated by reference to the
Exhibit 4.3 to the Registrant's Registration Statement on Form S-8
filed with the Securities and Exchange Commission on October 10, 1989).
10.7 Argonaut Group, Inc. 1986 Stock Option Plan, as amended (incorporated
by reference to the Exhibit 4.3 to the Registrant's Registration
Statement on Form S-8 filed with the Securities and Exchange Commission
on December 9, 1997).
10.8 Argonaut Group, Inc. Stock Option Plan, as amended (incorporated by
reference to the Exhibit 4.3 to the Registrant's Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on August
27, 1999).
10.9 Employee Stock Investment Plan (incorporated by reference to the
Exhibit 4.3 to the Registrant's Registration Statement on Form S-8
filed with the Securities and Exchange Commission on October 22, 1999).
Page 18
19
<PAGE>
13. The following materials are excerpted from the Annual Report to
Shareholders of Argonaut Group, Inc. for the fiscal year ended
December 31, 1999:
a) Selected Financial Data
b) Financial Statements
c) Common Stock Market Prices
d) Management's Discussion and Analysis of Results of Operations
and Financial Condition
21. Subsidiaries of Registrant (incorporated by reference to the Exhibit 21
to the Registrant's Form 10 Registration Statement dated September 3,
1986, filed with the Securities and Exchange Commission on September 4,
1986).
23. Consent of Independent Public Accountants.
27. Financial Data Schedule for December 31, 1999 Form 10-K.
(b) Reports on Form 8-K.
A report was filed on Form 8-K on January 21, 2000.
Page 19
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ Mark E. Watson, III
-------------------------
Mark E. Watson, III
President
Date: March 21, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Mark E. Watson, III President, Chief Executive March 21, 2000
- ----------------------- Officer, and Director
Mark E.Watson, III
/s/ James B Halliday Vice President, Secretary, March 21, 2000
- ----------------------- and Treasurer (principal
James B Halliday financial and accounting
officer)
/s/ George A. Roberts Director March 21, 2000
- -----------------------
George A. Roberts
/s/ Michael T. Gray Director March 21, 2000
- -----------------------
Michael T. Gray
/s/ Jerrold V. Jerome Director March 21, 2000
- -----------------------
Jerrold V. Jerome
/s/ Judith R. Nelson Director March 21, 2000
- -----------------------
Judith R. Nelson
/s/ John R. Power, Jr. Director March 21, 2000
- -----------------------
John R. Power, Jr.
Page 20
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To the Shareholders of Argonaut Group, Inc.
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Argonaut Group, Inc.'s annual
report to shareholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated January 21, 2000. Our audit was made for the
purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. The schedules listed in Part IV, Item 14(a)(2) are the
responsibility of the Company's management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic consolidated financial statements. These schedules have been
subjected to the auditing procedures applied in our audit of the basic
consolidated financial statements and, in our opinion, are fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California
January 21, 2000
22
<PAGE>
ARGONAUT GROUP, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
($ in millions)
<TABLE>
<CAPTION>
BALANCE SHEET
December 31,
-----------------
Assets 1999 1998
------ -------
<S> <C> <C>
Short-term investments $ 0.1 $ 10.1
Cash & cash equivalents 0.2 0.3
Investment in subsidiary 546.1 661.1
Cost in excess of net assets purchased 32.7 35.5
Deferred Federal income taxes receivable 77.9 68.8
Other assets 9.8 9.3
------ ------
$ 666.8 $ 785.1
====== ======
Liabilities & Shareholders' Equity
Income taxes payable $ 0.8 $ 7.0
Other liabilities 1.6 1.0
Due from/(to) subsidiaries 36.0 22.7
Shareholders' equity 628.4 754.4
------ ------
$ 666.8 $ 785.1
====== ======
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS For The Year Ended December 31,
-------------------------------------------------
1999 1998 1997
--------------- -------------- ---------------
<S> <C> <C> <C>
Revenues $ 3.7 $ 4.1 $ 5.3
Expenses:
Amortization of cost in excess of net assets 2.8 2.8 2.8
Other expenses 5.0 5.2 4.0
Loss before tax and undistributed earnings (4.1) (3.9) (1.5)
Provision for income taxes (8.8) 21.9 12.5
--------------- -------------- ---------------
Net loss before equity in earnings of subsidiary 4.7 (25.8) (14.0)
Equity (loss) in undistributed earnings of subsidiary (10.7) 64.8 50.5
--------------- -------------- ---------------
Net Income (loss) $(6.0) $39.0 $36.5
=============== ============== ===============
</TABLE>
23
<PAGE>
ARGONAUT GROUP, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
($ in millions)
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS For The Year Ended December 31,
--------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6.0) $ 39.0 $ 36.5
Adjustments to reconcile net income to
net cash provided by operations:
Amortization 2.8 2.8 2.8
Undistributed loss (earnings) in subsidiary 10.7 (64.8) (50.5)
Dividend from subsidiary 66.4 40.5 38.3
Decrease in deferred federal income taxes
(payable) receivable (9.0) 20.8 13.1
Increase (decrease) in due from/to subsidiaries 13.3 (2.0) (2.5)
Increase (decrease) in income taxes payable (6.2) 3.7 2.1
Other, net 0.1 (0.2) (0.4)
-------------- -------------- --------------
72.1 39.8 39.4
-------------- -------------- --------------
Cash flows from investing activities:
Decrease (increase) in short-term investments 10.0 (4.8) (2.2)
-------------- -------------- --------------
10.0 (4.8) (2.2)
-------------- -------------- --------------
Cash flows from financing activities:
Repurchase of common stock (44.1) (0.5) -
Payment of cash dividend (38.9) (39.3) (38.1)
Exercise of stock options 0.8 4.6 1.2
-------------- -------------- --------------
(82.2) (35.2) (36.9)
-------------- -------------- --------------
Increase (decrease) in cash & cash equivalents (0.1) (0.2) 0.3
Cash & cash equivalents, beginning of period 0.3 0.5 0.2
-------------- -------------- --------------
Cash & cash equivalents, end of period $0.2 $0.3 $0.5
============== ============== ==============
</TABLE>
24
<PAGE>
ARGONAUT GROUP, INC.
SCHEDULE V
SUPPLEMENTARY INSURANCE INFORMATION
Years Ended December 31, 1999, 1998, and 1997
($ in millions)
<TABLE>
<CAPTION>
Amortization
Future Other Premium Net Invt Ben Loss,(Deferral) Other Premiums
DPAC Benefits UPR Payables Revenue Income & LAE DPAC Insur.Exp Written
Segment (a) (b) (c) (d) (e) (f) (1) (g) (h) (i)(2) (j)
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Workers Comp $1.4 $ 474.2 $ 24.2 - $ 65.7 $ 27.6 $ 92.6 $ (1.6) $ 52.6 $ 98.4
All Other 1.9 423.2 19.7 - 27.3 24.7 28.8 0.1 10.5 23.8
Unallocable - - - - - 16.2 - - - -
--------- -------- --------- ------------------ --------- ------------------ --------- ---------
$ 3.3 $ 897.4 $ 43.9 - $93.0 $ 68.5 $121.4 $(1.5) $63.1 $122.2
========= ======== ========= ================== ========= ================== ========= =========
Year Ended December 31, 1998
Workers Comp $ 3.0 $ 499.6 $ 17.1 - $115.6 $ 28.2 $ 75.5 $ 0.3 $ 65.0 $119.2
All Other 1.8 396.3 19.7 - 22.9 22.3 19.6 0.4 10.6 24.9
Unallocable - - - - - 26.9 - - - -
--------- -------- --------- ------------------ --------- ------------------ --------- ---------
$ 4.8 $ 895.9 $ 36.8 - $138.5 $ 77.4 $ 95.1 $ 0.7 $ 75.6 $144.1
========= ======== ========= ================== ========= ================== ========= =========
Year Ended December 31, 1997
Workers Comp $ 2.7 $ 572.4 $ 20.8 - $140.6 $ 36.5 $91.1 $(1.3) $72.2 $132.3
All Other 1.3 452.5 19.4 - 24.3 28.8 21.7 0.1 7.2 25.9
Unallocable - - - - - 21.9 - - - -
--------- -------- --------- ------------------ --------- ------------------ --------- ---------
$ 4.0 $1,024.9 $ 40.2 - $164.9 $87.2 $112.8 $(1.2) $ 79.4 $158.2
========= ======== ========= ================== ========= ================== ========= =========
</TABLE>
(a) Deferred Policy Acquisition Costs
(b) Future Policy Benefits, Claims, and Claim Adjustment Expenses
(c) Unearned Premiums
(d) Other Policy Claims and Benefits Payable
(e) Premium Revenue
(f) Net Investment Income
(g) Benefits, Claims, and Claim Adjustment Expenses
(h) Amortization of Deferred Policy Acquisition Costs
(i) Other Insurance Expenses
(j) Premiums Written
(1) Net investment income allocated based uponeachsegment's share of
investable funds
(2) Other insurance expenses allocated basedon specific identification,
where possible,and related activities.
25
<PAGE>
EXHIBIT INDEX
Exhibit Document
No.
2. Information Statement of Registrant (incorporated by reference to the
Exhibit 2 to the Registrant's Form 10 Registration Statement dated
September 3, 1986, filed with the Securities and Exchange Commission
on September 4, 1986).
3.1 Certificate of Incorporation of Registrant (incorporated by reference
to the Exhibit 3.1 to the Registrant's Form 10 Registration Statement
dated September 3, 1986, filed with the Securities and Exchange
Commission on September 4, 1986).
3.2 Bylaws of the Registrant (incorporated by reference to the Exhibit 3.2
to the Registrant's Form 10 Registration Statement dated September 3,
1986, filed with the Securities and Exchange Commission on September 4,
1986).
10.1 Argonaut Group, Inc. 1986 Stock Option Plan (incorporated by reference
to the Exhibit 10.1 to the Registrant's Form 10 Registration Statement
dated September 3, 1986, filed with the Securities and Exchange
Commission on September 4, 1986).
10.2 Argonaut Group, Inc. Retirement Plan (incorporated by reference to the
Exhibit 10.2 to the Registrant's Form 10 Registration Statement dated
September 3, 1986, filed with the Securities and Exchange Commission on
September 4, 1986).
10.3 Tax Agreement by and among Registrant and its subsidiaries and
Teledyne, Inc. (incorporated by reference to the Exhibit 10.3 to the
Registrant's Form 10 Registration Statement dated September 3, 1986,
filed with the Securities and Exchange Commission on September 4,
1986).
10.4 Argonaut Group, Inc. 1986 Stock Option Plan, as amended (incorporated
by reference to the Exhibit 4.3 to the Registrant's Registra-
tion Statement on Form S-8 filed with the Securities and
Exchange Commission on February 13, 1987).
10.5 401(k) Retirement Savings Plan (incorporated by reference to the
Exhibit 10.4 to the Registrant's Form 10-K filed with the Securities
and Exchange Commission on February 28, 1989).
10.6 Employee Stock Investment Plan (incorporated by reference to the
Exhibit 4.3 to the Registrant's Registration Statement on Form S-8
filed with the Securities and Exchange Commission on October 10, 1989).
10.7 Argonaut Group, Inc. 1986 Stock Option Plan, as amended (incorporated
by reference to the Exhibit 4.3 to the Registrant's Registration
Statement on Form S-8 filed with the Securities and Exchange Commission
on December 9, 1997).
10.8 Argonaut Group, Inc. Stock Option Plan, as amended (incorporated by
reference to the Exhibit 4.3 to the Registrant's Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on August
27, 1999).
10.9 Employee Stock Investment Plan (incorporated by reference to the
Exhibit 4.3 to the Registrant's Registration Statement on Form S-8
filed with the Securities and Exchange Commission on October 22, 1999).
13. The following materials are excerpted from the Annual Report to
Shareholders of Argonaut Group, Inc. for the fiscal year ended
December 31, 1999:
a) Selected Financial Data
b) Financial Statements
c) Common Stock Market Prices
d) Management's Discussion and Analysis of Results of Operations
and Financial Condition
21. Subsidiaries of Registrant (incorporated by reference to the Exhibit 21
to the Registrant's Form 10 Registration Statement dated September 3,
1986, filed with the Securities and Exchange Commission on September 4,
1986).
23. Consent of Independent Public Accountants.
27. Financial Data Schedule for December 31, 1999 Form 10-K.
(b) Reports on Form 8-K.
A report was filed on Form 8-K on January 21, 2000.
1
<PAGE>
Exhibit 13
ARGONAUT GROUP, INC. AND SUBSIDIARIES
Selected Financial Data
<TABLE>
<CAPTION>
In millions For the Years Ended December 31, 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Premiums:
Workers compensation $ 65.7 $ 115.6 $ 140.6 $ 129.5 $ 176.7
Other insurance 27.3 22.9 24.3 32.2 31.4
- ------------------------------------------------------------------------------------------------------------
93.0 138.5 164.9 161.7 208.1
Net investment income 68.5 77.4 87.2 89.5 102.0
Gains on sales of investments 2.8 51.2 4.5 21.6 3.1
- ------------------------------------------------------------------------------------------------------------
Total revenue $ 164.3 $ 267.1 $ 256.6 $ 272.8 $ 313.2
============================================================================================================
Underwriting gain (loss) before income taxes:
Workers compensation $ (80.6) $ (24.1) $ (21.2) $ (5.3) $ 3.3
Other continuing lines (10.6) (7.1) (8.4) (124.6) (35.6)
Run off lines (0.9) 0.6 2.4 (127.4) --
- -------------------------------------------------------------------------------------------------------------
$ (92.1) $ (30.6) $ (27.2) $ (257.3) $ (32.3)
=============================================================================================================
Income (loss) before income taxes $ (25.5) $ 93.5 $ 61.3 $ (149.0) $ 69.7
Provision (benefit) for income taxes (10.3) 30.8 12.8 (55.0) 12.8
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ (15.2) $ 62.7 $ 48.5 $ (94.0) $ 56.9
============================================================================================================
Net income (loss) per common share:
Basic $ (0.64) $ 2.62 $ 2.04 $ (3.92) $ 2.34
============================================================================================================
Diluted $ (0.64) $ 2.61 $ 2.02 $ (3.92) $ 2.32
============================================================================================================
Balance Sheet Data
Portfolio investments $1,175.9 $1,372.8 $1,369.1 $1,395.5 $1,489.2
==========================================================================================================
Total assets $1,625.1 $1,823.0 $1,898.8 $1,944.4 $1,977.5
==========================================================================================================
Reserves for losses and loss
adjustment expenses $ 897.4 $ 935.8 $1,063.2 $1,158.8 $1,026.1
==========================================================================================================
Shareholders' equity $ 628.4 $ 754.4 $ 717.9 $ 665.3 $ 810.8
==========================================================================================================
Cash dividends declared per
common share $ 1.64 $ 1.64 $ 1.60 $ 1.44 $ 1.28
==========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
13-1
2
<PAGE>
Exhibit 13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Argonaut Group, Inc.
We have audited the accompanying consolidated balance sheets of Argonaut Group,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, comprehensive income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Argonaut Group,
Inc. and subsidiaries as of December 31, 1999 and 1998, and their results of
operations, comprehensive income and cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 21, 2000
13-2
3
<PAGE>
Exhibit 13
ARGONAUT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
In millions December 31, 1999 1998
<S> <C> <C>
Assets
Investments:
Fixed maturities, available for sale, at fair value $ 745.4 $ 942.8
(cost: 1999-- $775.8; 1998-- $915.5)
Equity securities, available for sale, at fair value 427.1 408.5
(cost: 1999-- $202.2; 1998-- $197.4)
Short-term investments, available for sale, at fair value 0.8 19.9
Securities in transit 2.6 1.6
- ------------------------------------------------------------------------------------------------------------
1,175.9 1,372.8
Cash and cash equivalents 31.2 24.5
Accrued investment income 16.2 18.7
Receivables:
Due from insureds 92.8 103.7
Due from reinsurance 218.3 196.1
Accrued retrospective premiums 31.0 52.8
Cost in excess of net assets purchased 32.7 35.5
Unearned premiums on ceded reinsurance 1.2 0.9
Accrued policyholder dividends recaptures 3.0 2.5
Deferred federal income tax asset, net 10.3 --
Other assets 12.5 15.5
- ------------------------------------------------------------------------------------------------------------
$1,625.1 $1,823.0
============================================================================================================
Liabilities and Shareholders' Equity
Reserves for losses and loss adjustment expenses $ 897.4 $ 935.8
Unearned premiums 43.9 36.8
Deferred federal income tax liability, net -- 14.2
Other liabilities 55.4 81.8
- ------------------------------------------------------------------------------------------------------------
996.7 1,068.6
- ------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock -- $.10 par, 35,000,000 shares authorized, 22,359,816 and
24,077,792 shares issued and outstanding
at December 31, 1999 and December 31, 1998, respectively 2.2 2.4
Additional paid-in capital 96.8 102.9
Retained earnings 403.0 494.1
Accumulated other comprehensive income 126.4 155.0
- ------------------------------------------------------------------------------------------------------------
628.4 754.4
- ------------------------------------------------------------------------------------------------------------
$1,625.1 $1,823.0
============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
13-3
4
<PAGE>
Exhibit 13
ARGONAUT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
----------------------------------
<TABLE>
<CAPTION>
In millions except per share amounts For the Years Ended December 31, 1999 1998 1997
<S> <C> <C> <C>
Premiums and other revenue:
Premiums, net $ 93.0 $138.5 $164.9
Net investment income 68.5 77.4 87.2
Gains on sales of investments 2.8 51.2 4.5
- ------------------------------------------------------------------------------------------------------------
Total revenue 164.3 267.1 256.6
- ------------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 121.4 95.1 112.8
Underwriting, acquisition, and insurance expenses 64.6 74.9 80.6
Amortization of cost in excess of net assets purchased 2.8 2.8 2.8
Policyholder dividends 1.0 0.8 (0.9)
- -------------------------------------------------------------------------------------------------------------
Total expenses 189.8 173.6 195.3
- -------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (25.5) 93.5 61.3
Provision (benefit) for income taxes (10.3) 30.8 12.8
- -------------------------------------------------------------------------------------------------------------
Net income (loss) $(15.2) $ 62.7 $ 48.5
============================================================================================================
Net income (loss) per common share:
Basic $(0.64) $ 2.62 $ 2.04
=============================================================================================================
Diluted $(0.64) $ 2.61 $ 2.02
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
13-4
5
<PAGE>
Exhibit 13
ARGONAUT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
In millions 1999 1998 1997
(Unaudited)
<S> <C> <C> <C>
Net income (loss) $(15.2) $ 62.7 $48.5
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Gains (losses) arising during the year (41.2) 65.0 67.7
Reclassification adjustment for gains included in net income or loss (2.8) (51.2) (4.5)
- -------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) before tax (44.0) 13.8 63.2
Income tax expense (recoverable) related to other comprehensive income (15.4) 4.8 22.1
- -------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax (28.6) 9.0 41.1
- -------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $(43.8) $ 71.7 $89.6
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
13-5
6
<PAGE>
Exhibit 13
ARGONAUT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
In millions Common Additional Retained Accumulated Shareholders'
Stock Paid-In Earnings Other Equity
Capital Comprehensive
Income
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $2.4 $97.1 $460.9 $104.9 $665.3
Net income 48.5 48.5
Other comprehensive income 41.1 41.1
Cash dividends ($1.60 per share) (38.2) (38.2)
Stock options exercised 1.2 1.2
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 2.4 98.3 471.2 146.0 717.9
Net income 62.7 62.7
Other comprehensive income 9.0 9.0
Repurchase and retirement of
common stock (0.5) (0.5)
Cash dividends ($1.64 per share) (39.3) (39.3)
Stock options exercised 4.6 4.6
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 2.4 102.9 494.1 155.0 754.4
Net loss (15.2) (15.2)
Other comprehensive loss (28.6) (28.6)
Repurchase and retirement of
common stock (0.2) (6.9) (37.0) (44.1)
Cash dividends ($1.64 per share) (38.9) (38.9)
Stock options exercised 0.8 0.8
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $2.2 $96.8 $403.0 $126.4 $628.4
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13-6
7
<PAGE>
ARGONAUT GROUP, INC. AND SUBSIDIARIES Exhibit 13
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
In millions For the Years Ended December 31, 1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (15.2) $ 62.7 $ 48.5
Adjustments to reconcile net income (loss) to
net cash used by operations:
Amortization and depreciation 6.8 8.6 12.1
Deferred federal income tax provision (benefit) (9.2) 20.8 13.4
Gains on sales of investments (2.8) (51.2) (4.5)
Decrease in accrued investment income 2.5 1.6 2.1
Decrease (increase) in receivables from insureds 10.9 8.8 (36.0)
Decrease (increase) in reinsurance receivables (22.2) 14.1 24.4
Decrease in accrued retrospective premiums 21.8 9.0 18.8
Decrease (increase) in unearned premiums on ceded reinsurance (0.3) (0.1) 0.2
Decrease in reserves for losses and loss
adjustment expenses (38.4) (127.4) (95.7)
Increase (decrease) in unearned premiums 7.1 (3.4) (25.1)
Increase in accrued policyholder dividends (0.5) (0.1) (3.7)
Increase (decrease) in income taxes payable (11.1) 6.8 38.6
Decrease in other assets and liabilities (14.2) (6.9) (15.0)
- -------------------------------------------------------------------------------------------------------------
(64.8) (56.7) (21.9)
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Sales of fixed maturity investments 61.0 13.3 13.0
Maturities and mandatory calls of fixed maturity investments 107.9 248.3 392.0
Sales of equity securities 18.4 96.0 80.5
Purchases of fixed maturity investments (30.7) (335.1) (319.2)
Purchases of equity securities (21.0) (15.0) (15.0)
Decrease (increase) in short-term investments 19.1 61.0 (74.8)
Other, net (1.0) (11.1) 10.7
- -------------------------------------------------------------------------------------------------------------
153.7 57.4 87.2
- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repurchase of common stock (44.1) (0.5) --
Payment of cash dividend (38.9) (39.3) (38.1)
Exercise of stock options 0.8 4.6 1.2
- -------------------------------------------------------------------------------------------------------------
(82.2) (35.2) (36.9)
- -------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents 6.7 (34.5) 28.4
Cash and cash equivalents, beginning of period 24.5 59.0 30.6
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 31.2 $ 24.5 $ 59.0
=============================================================================================================
Additional disclosure:
Income taxes paid $ 9.7 $ 1.7 $ --
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
13-7
8
<PAGE>
Exhibit 13
ARGONAUT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Business and Significant Accounting Policies
Business Argonaut Group, Inc. (the Company) is a national provider of specialty
insurance products focused on high-quality customer service for specific niches
of property-casualty insurance. Workers compensation is the primary line of
insurance written by Argonaut Insurance Company, the principal insurance
subsidiary. Argonaut Insurance Company also writes a limited amount of
complementary lines of commercial insurance, primarily general and automobile
liability, but targets companies whose workers compensation needs will result in
significant annual premiums (generally between $250,000 and $5 million) in
classes of insurance which require specific expertise to underwrite prudently,
enhance the safety of the workplace, and effectively manage losses through
partnership with the insured. These classes include contractors, wholesalers,
retailers, light manufacturers, technology firms, service firms (such as in the
hospitality industry), and clients who use self-insurance to meet some or all of
their insurance needs. Argonaut Insurance Company has also recently announced a
partnership with Esurance to provide personal auto insurance nationally on the
Internet (www.esurance.com).
Argonaut Great Central Insurance Company specializes in commercial
multiple-peril, workers compensation, and umbrella coverages specifically for
food merchants, restaurants, churches, and laundry/dry cleaners.
Basis of Presentation The consolidated financial statements of Argonaut Group,
Inc. and subsidiaries have been prepared in accordance with generally accepted
accounting principles (GAAP), which differ from statutory insurance accounting
practices. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The financial statements include the accounts and operations of Argonaut Group,
Inc. and its subsidiaries. All material intercompany accounts and transactions
have been eliminated. Certain prior year balances have been restated to reflect
current year classifications.
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and securities with an original maturity of less than ninety days.
Investments Investments in fixed maturities at December 31, 1999 and 1998
include bonds, notes, and redeemable preferred stocks. Equity securities include
common and nonredeemable preferred stocks. Short-term investments consist of
funds which are in excess of the Company's near-term operating and claims-paying
needs and are invested in repurchase agreements, commercial paper, and money
market funds.
All investments are considered available for sale and are carried at fair value.
Fair values for fixed maturity investments and equity securities are based on
quoted market prices or dealer quotes. Unrealized appreciation or depreciation
on fixed maturity investments and equity securities is included, net of
applicable deferred income taxes, in shareholders' equity. Gains and losses on
sales of investments are computed on the specific identification method and are
reflected in total revenue.
Receivables Receivables due from insureds are presented net of a reserve for
uncollectible accounts of $1.5 million and $1.7 million at December 31, 1999 and
1998 respectively.
Receivables due from reinsurance of paid loss and loss adjustment expenses are
presented net of a reserve for uncollectible accounts of $4.1 million and $2.6
million at December 31, 1999 and December 31, 1998 respectively.
Accrued retrospective premiums are based upon actuarial estimates of expected
ultimate losses. Management believes that the accrued retrospective premium
receivable is reasonable. While the eventual receivable may differ from the
current estimates, management does not believe that this difference will have a
material effect, either adversely or favorably, on the Company's financial
position and results of operations.
13-8
9
<PAGE>
Exhibit 13
Cost in Excess of Net Assets Purchased Cost in excess of net assets purchased of
$32.7 million at December 31, 1999 and $35.9 million at December 31, 1998,
relate to Teledyne, Inc.'s acquisition of Argonaut Insurance Company in 1969,
and is net of accumulated amortization of $36.9 million and $34.1 million,
respectively. Cost in excess of net assets purchased is being amortized on a
straight-line basis over a 25-year period beginning October 1, 1986. At each
balance sheet date, the Company evaluates the recoverability of its cost in
excess of net assets purchased in relation to anticipated future cash flows on
an undiscounted basis. If the carrying value of the cost in excess of net assets
purchased exceeds anticipated future cash flows on an undiscounted basis, then
the cost in excess of net assets purchased is deemed to be impaired and written
down to the value of the anticipated future cash flows. Based on this annual
assessment, the Company expects its cost in excess of net assets purchased to be
fully recovered.
Recognition of Premium Revenue & Related Expenses Premium revenue is recognized
ratably over the period to which the premium relates. Policy acquisition costs,
included in other assets, consisting primarily of commissions and premium taxes,
are deferred and amortized over the period in which the related premium is
earned. Deferred policy acquisition costs are limited to their estimated
realizable value based on the related unearned premium and take into account
anticipated claims and claims expenses, based on historical and current
experience, and investment income.
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 was to have been 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.
13-9
10
<PAGE>
Exhibit 13
2. INVESTMENTS
Gains on sales and calls of investments for the years ended December 31, were as
follows.
<TABLE>
<CAPTION>
millions 1999 1998 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $0.6 $ 0.2 $ -
Equity securities 2.2 51.0 4.5
- ----------------------------------------------------------------
$2.8 $ 51.2 $4.5
================================================================
</TABLE>
The amortized cost and fair value of fixed maturity investments as of December
31, were as follows.
<TABLE>
<CAPTION>
In millions 1999
- -------------------------------------------------------------------------------
Amortized Gross Gross Fair
Cost Unrealized Unrealized Value
Gains Losses
<S> <C> <C> <C> <C>
U.S. Treasury securities $139.9 $ - $ 1.4 $138.5
U.S. Government agencies 595.9 - 29.3 566.6
Obligations of states and
political subdivisions 26.3 0.2 0.1 26.4
Redemptive preferred stock 13.7 0.4 0.2 13.9
- -------------------------------------------------------------------------------
$775.8 $0.6 $31.0 $745.4
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
In millions 1998
- -------------------------------------------------------------------------------
Amortized Gross Gross Fair
Cost Unrealized Unrealized Value
Gains Losses
<S> <C> <C> <C> <C>
U.S. Treasury securities $237.6 $11.0 $ - $248.6
U.S. Government agencies 585.9 14.1 0.1 599.9
Obligations of states and
political subdivisions 78.3 1.7 - 80.0
Redemptive preferred stock 13.7 0.8 0.2 14.3
- -------------------------------------------------------------------------------
$915.5 $27.6 $0.3 $942.8
===============================================================================
</TABLE>
The amortized cost and market values of fixed maturity investments as of
December 31, 1999 by contractual maturity, are shown below.
<TABLE>
<CAPTION>
In millions
- -------------------------------------------------------------------------------
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 13.9 $ 13.9
Due after one year to five years 84.1 83.5
Due after five years to ten years 677.8 648.0
- -------------------------------------------------------------------------------
$775.8 $745.4
===============================================================================
</TABLE>
13-10
11
<PAGE>
Exhibit 13
The expected maturities may differ from the contractual maturities because
debtors may have the right to call or prepay obligations without penalties.
Proceeds from sales of fixed maturity investments were $61.0 million, $13.3
million, and $13.0 million in 1999, 1998, and 1997, respectively. Gross gains of
$0.6 million, $0.2 million, and $0 and no gross losses were realized on those
sales in 1999, 1998, and 1997, respectively.
At December 31, 1999 the amortized cost and fair value of bonds on deposit with
various insurance regulatory agencies were $381.4 million and $367.3 million,
respectively.
Additionally, U.S. Treasury Notes with an amortized cost of $6.8 million and
fair value of $6.5 million were pledged as collateral for surety bonds which
were issued to various states in lieu of depositing bonds.
At December 31, 1999 the Company's investment in International Paper Company
common stock with a market value of $66.8 million, was 10.6% of shareholder's
equity. At December 31, 1998, there were no investments in any one investee
exceeding 10% of shareholders' equity.
13-11
12
<PAGE>
Exhibit 13
3. Reinsurance
The Company reinsures certain risks with other insurance companies. Such
arrangements serve to limit the Company's maximum loss on catastrophes and large
or unusually hazardous risks. The Company is liable for reinsurance ceded in the
event its reinsurers do not meet their obligations. The Company's reserves for
nonrecoverable reinsurance were $11.2 million and $8.6 million as of December
31, 1999 and 1998, respectively. Under certain of the reinsurance agreements,
funds are held to secure performance of reinsurers in meeting their obligations.
The amount of such funds was $17.6 million and $18.1 million at December 31,
1999 and 1998, respectively.
Estimated losses recoverable from reinsurers and the ceded portion of unearned
premiums are reported as assets.
Losses and loss adjustment expenses of $121.4 million, $95.1 million, and $112.8
million for the years ending December 31, 1999, 1998, and 1997, respectively,
are net of cessions of $54.1 million, $20.7 million, and $65.4 million,
respectively.
While the Company is not in the business of assuming reinsurance risks, it is
required to accept certain assigned risks and other legally mandated reinsurance
obligations.
In previous years, the Company actively assumed various forms of casualty
reinsurance for which it continues to maintain reserves for loss and loss
adjustment expenses (Note 12).
<TABLE>
<CAPTION>
Premiums for the years ended December 31, were as follows.
In millions 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Direct written premiums $139.6 $160.4 $165.7
Reinsurance ceded to
other companies (18.1) (18.6) (15.8)
Reinsurance assumed from
other companies 0.7 2.3 8.3
- ------------------------------------------------------------------------------
Net written premiums $122.2 $144.1 $158.2
==============================================================================
Direct earned premiums 109.8 154.0 $176.6
Reinsurance ceded to
other companies (17.8) (18.5) (16.0)
Reinsurance assumed from
other companies 1.0 3.0 4.3
- ------------------------------------------------------------------------------
Net earned premiums $ 93.0 $138.5 $164.9
==============================================================================
Percentage of reinsurance
assumed to net earned premiums 1.1% 2.2% 2.6%
</TABLE>
13-12
13
<PAGE>
Exhibit 13
4. Reserves for Losses and Loss Adjustment Expenses
The following table provides a reconciliation of reserves for losses and loss
adjustment expenses for the years ended December 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
In millions 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserves for losses and loss
adjustment expenses at
beginning of year* $935.8 $1,063.2 $1,158.9
Losses and loss adjustment expenses:
Provision for losses and loss
adjustment expenses for claims
occurring in the current year 118.0 128.2 132.6
Increase (decrease) in estimated
losses and loss adjustment expenses
for claims occurring in prior years 57.5 (12.4) 45.6
- -------------------------------------------------------------------------------
175.5 115.8 178.2
- -------------------------------------------------------------------------------
Losses and loss adjustment expense payments for claims occurring during:
Current year 36.4 45.4 39.7
Prior years 177.5 197.8 234.2
- -------------------------------------------------------------------------------
213.9 243.2 273.9
- -------------------------------------------------------------------------------
Reserves for losses and loss
adjustment expenses at end of year $897.4 $935.8 $1,063.2
===============================================================================
</TABLE>
*Restated
Reserves for losses and loss adjustment expenses represent the estimated
indemnity cost and related adjustment expenses necessary to investigate and
settle claims. Such estimates are based upon individual case estimates for
reported claims, estimates from ceding companies for reinsurance assumed, and
actuarial estimates for losses which have been incurred but not yet reported to
the insurer. Any change in probable ultimate liabilities is reflected in current
operating results.
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss adjustment expenses (net of estimated reinsurance
recoveries of $48.6 million) increased by $57.5 million in 1999 primarily due to
higher than anticipated losses and related expenses for workers compensation
claims.
The ultimate cost of claims, particularly liability claims, is difficult to
predict for several reasons including: the uncertain time period for reporting
claims, changes in the legal environment and court decisions, and federal and
state legislation which may dramatically increase the liability between the time
a policy is written and associated claims are ultimately resolved.
As an example, liability for exposure to toxic substances and environmental
impairment, which did not appear likely or even exist when the policies were
written, has been imposed by legislators and judicial interpretation. Tort
liability has been expanded by some jurisdictions to cover defective
workmanship.
Liabilities assumed from other insurance companies under reinsurance contracts
are subject to the same factors, and further complicated by long periods of time
between the date of occurrence and the date of the Company's notification of the
claim.
Management believes the reserves for loss and loss adjustment expenses
established are adequate and the associated estimate of reinsurance recoverable
is reasonable. While the eventual ultimate liability and reinsurance recoverable
may differ from the current estimates, management does not believe that the
difference will have a material effect, either adversely or favorably, on the
Company's financial position and results of operations.
The Company discounted certain workers compensation pension-type reserves using
a maximum interest rate of 3.5% in 1999 and 1998. The amount of unamortized
discount was $41.4 million at December 31, 1999 and $35.5 million at December
31, 1998.
13-13
14
<PAGE>
Exhibit 13
5. Income Taxes
The Company's income tax provision includes the following components.
<TABLE>
<CAPTION>
In millions 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax provision (benefit) $ (1.1) $ 10.0 $(0.3)
Deferred tax provision (benefit) related to:
Future tax deductions (0.7) 16.4 18.9
Net operating loss carryforward (8.5) 16.2 (5.1)
Deferred alternative minimum
tax provision - (11.8) (0.7)
- -------------------------------------------------------------------------------
Income tax provision (benefit) $(10.3) $ 30.8 $12.8
===============================================================================
</TABLE>
A reconciliation of the Company's income tax provision or benefit to the
provision or benefit which would have resulted if the tax had been computed at
the statutory rate is as follows.
<TABLE>
<CAPTION>
In millions 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax provision (benefit) at statutory
tax rates (35%) $ (9.5) $32.3 $21.1
Tax effect of:
Tax exempt interest (0.8) (1.4) (1.7)
Dividends received deduction (2.4) (1.7) (6.1)
Other permanent adjustments, net 0.8 (0.6) (1.6)
State income tax provision 1.6 1.0 1.1
- -------------------------------------------------------------------------------
Income tax provision (benefit) $(10.3) $30.8 $12.8
===============================================================================
</TABLE>
Deferred taxes arise from temporary differences in the recognition of revenue
and expenses for tax and financial reporting purposes. Net deferred tax assets
(liabilities) at December 31, 1999, 1998, and 1997 result from the following
tax-effected temporary differences shown in the following table. Tax benefit of
$146,000 associated with the exercise of employee stock options was allocated to
equity in 1999.
<TABLE>
<CAPTION>
In millions 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred liability on unrealized gains
Unrealized gains $(68.1) $(83.4) $(78.6)
Other, net (4.7) (5.9) 5.6
Deferred tax assets:
Reserve discounting 43.4 44.9 53.8
Alternative minimum tax 12.2 15.0 6.8
Net operating loss carryforward 27.5 15.2 23.9
- -------------------------------------------------------------------------------
Deferred tax asset (liability), net $ 10.3 $(14.2) $ 11.5
===============================================================================
</TABLE>
Realization of deferred tax assets is dependent upon the Company's generation of
sufficient taxable income in the future to recover tax benefits that cannot be
recovered from taxes paid in the carryback period, generally three years.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced. The Company has a regular federal tax net operating loss carryforward
of $38.0 million to expire after 2011, $16.5 million to expire in 2012, and
$24.2 million to expire after 2019.
13-14
15
<PAGE>
Exhibit 13
6. Shareholders' Equity
The Company is authorized to issue 5,000,000 shares of $0.10 par value preferred
stock. No preferred shares were issued or outstanding at December 31, 1999.
During 1999, the Company reacquired and retired 1,735,300 shares of its common
stock. The Company also retired 25,475 shares, during 1999, that were acquired
through exercise of employee stock options, or forfeited in the employee stock
purchase plan. During 1998, there were 22,577 shares reacquired through exercise
of employee stock options, or forfeited in the employee stock purchase plan. No
shares were reacquired during 1997.
The Company's insurance subsidiaries are regulated by the various states in
which they do business and prepare their financial statements in accordance with
statutory accounting principles. The amount of statutory net income and surplus
(shareholders' equity) for the insurance subsidiaries for the years ended
December 31, were as follows.
<TABLE>
<CAPTION>
In millions 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ (14.3) $ 68.8 $ 61.6
Surplus $ 579.5 $ 657.4 $ 564.8
- -------------------------------------------------------------------------------
</TABLE>
Various state insurance laws restrict the amount that may be transferred to
Argonaut Group, Inc. from its subsidiaries in the form of dividends without
prior approval of regulatory authorities. In addition, that portion of the
Company's net equity which results from the difference between statutory
insurance practices and generally accepted accounting principles would not be
available for dividends. At December 31, 1999, $633,000 was available for
dividends to Argonaut Group without prior regulatory approval. During 1999,
dividends of $66.4 million were paid to Argonaut Group.
7. Net Investment Income
Investment income and expenses for the years ended December 31, were as follows.
<TABLE>
<CAPTION>
In millions 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income:
Interest and dividends on
fixed maturities $54.7 $60.0 $62.0
Dividends on equity securities 11.6 13.0 20.7
Interest on short-term investments 0.3 2.0 2.8
Other 3.5 3.5 2.1
- -------------------------------------------------------------------------------
70.1 78.5 87.6
Investment expenses (1.6) (1.1) (0.4)
- -------------------------------------------------------------------------------
Net investment income $68.5 $77.4 $87.2
===============================================================================
</TABLE>
8. Underwriting, Acquisition, and Insurance Expenses
Underwriting, acquisition, and insurance expenses for the years ended December
31, were as follows.
<TABLE>
<CAPTION>
In millions 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Commissions $11.6 $14.6 $15.8
General expenses 40.5 50.7 45.1
State assessments 5.9 4.4 12.5
Taxes, licenses, and bureau fees 5.1 5.9 6.0
- -------------------------------------------------------------------------------
63.1 75.6 79.4
Amortization (deferral) of policy
acquisition costs 1.5 (0.7) 1.2
- -------------------------------------------------------------------------------
$64.6 $74.9 $80.6
===============================================================================
</TABLE>
13-15
16
<PAGE>
Exhibit 13
9. Benefit Plans
Pension The Company sponsors a qualified defined benefit plan and a
non-qualified unfunded supplemental defined benefit plan. The following table
sets forth change in benefit obligation, change in plan assets, weighted-average
assumptions and components of net periodic benefit cost as of December 31 with
respect to the qualified and non-qualified pension plans.
<TABLE>
<CAPTION>
In millions 1999 1998
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $30.6 $25.5
Service cost 1.8 1.7
Interest cost 1.9 1.8
Plan participant's contributions
Amendments - -
Actuarial (gain) loss (5.4) 2.6
Benefits paid (1.0) (1.0)
- -------------------------------------------------------------------------------
Benefit obligation at end of year 27.9 30.6
===============================================================================
Change in plan assets
Fair value of plan assets at beginning of year 34.0 30.6
Actual return on plan assets (1.1) 2.3
Employer contribution 0.1 2.1
Plan participants' contributions
Benefits paid (1.0) (1.0)
- -------------------------------------------------------------------------------
Fair value of plan assets at end of year 32.0 34.0
===============================================================================
Funded status 4.0 3.4
Unrecognized actuarial loss (2.9) (0.8)
Unrecognized prior service cost 1.2 1.3
Unrecognized net transition obligation (0.3) (0.3)
- -------------------------------------------------------------------------------
Net amount recognized $ 2.0 $ 3.5
===============================================================================
Amounts recognized in the statement of financial position consist of:
Prepaid benefit cost $ 3.2 $ 4.6
Accrued benefit liability (1.4) (1.5)
Intangible asset 0.2 0.4
Accumulated other comprehensive income - -
- -------------------------------------------------------------------------------
Net amount recognized $ 2.0 $ 3.5
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
In millions 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
assumptions as of December 31
Weighted average discount rate 7.5% 6.5%
Long term rate of return on plan assets 6.0% 6.0%
Expected rate of increase in future compensation levels 4.5% 4.5%
- -------------------------------------------------------------------------------
</TABLE>
13-16
17
<PAGE>
Exhibit 13
<TABLE>
<CAPTION>
In millions 1999 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
Components of net periodic benefit cost
Service cost $ 1.8 $ 1.7
Interest cost 1.9 1.8
Expected return on plan assets (2.0) (1.8)
Amortization of:
Transition asset (0.1) (0.1)
Prior service cost 0.1 0.2
(Gain) loss - (0.2)
- -----------------------------------------------------------------------------------
Total - (0.1)
- -----------------------------------------------------------------------------------
Net periodic benefit cost $ 1.7 $ 1.6
===================================================================================
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $1.7 million, $1.4 million, and $0 respectively, as
of December 31, 1999 and $1.8 million, $1.5 million, and $0, respectively, as of
December 31, 1998.
Stock Options In August 1986, the Board of Directors of Argonaut Group, Inc.
adopted the Stock Option Plan covering an aggregate 1,500,000 shares of Argonaut
Group, Inc. Common Stock. An amendment to the Plan increasing the number of
shares of common stock issuable under the Plan from 1,500,000 to 2,000,000 was
approved on April 23, 1996 at the Company's Annual Meeting. A second amendment
to the Plan increasing the number of shares of common stock issuable under the
Plan from 2,000,000 to 2,500,000 was approved on April 27, 1999 at the Company's
Annual Meeting. Under the Stock Option Plan, options to purchase shares of
Argonaut Group, Inc. common stock may be granted to certain key employees. The
options may be incentive stock options or nonqualified stock options. If
incentive options are granted, the exercise price of the options will be the
fair market value of the shares on the date that the option is granted. The
exercise price of nonqualified stock options to be granted can be below the fair
market value of the shares on the grant date. To date all options granted have
been at the fair market value of the shares on the date of grant, and as such,
no compensation expense has been recognized as accounted for under APB Opinion
No. 25. The options are nontransferable and are exercisable in installments.
In October, 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation"
(FAS 123). As permitted by FAS 123, the Company will not change its method of
accounting for stock options but has provided the additional required
disclosures in the tables below. The additional compensation costs that would
have been recorded if the Company had adopted FAS 123 are not material.
At December 31, 1999, 971,090 shares were available for future grant. The
options are fully vested after 6 years and expire after 11 years.
A summary of the status of the Company's stock option plan at December 31, 1999,
1998, and 1997 is presented in the table below.
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Number Weighted-Average Number Weighted-Average Number Weighted-Average
of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the year 896,440 $28.87 1,080,040 $24.63 1,035,270 $23.79
Granted 124,000 25.60 160,500 34.35 151,900 29.01
Exercised (41,600) 17.71 (244,400) 12.97 (64,880) 17.84
Cancelled (125,450) 31.05 (99,700) 30.74 (42,250) 30.05
Outstanding at end of the year 853,390 $28.62 896,440 $28.87 1,080,040 $24.63
Exercisable at end of year 428,800 27.36 416,230 26.20 560,560 19.91
Weighted-average fair value of options
granted during the year $ 2.71 $ 4.67 $ 4.26
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13-17
18
<PAGE>
Exhibit 13
The following table summarizes information about stock options outstanding
at December 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------------------
Range of Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise Price Outstanding at Remaining Exercise Price Exercisable Exercise Price
12/31/99 Contractual Life at 12/31/99
<S> <C> <C> <C> <C> <C>
$22.67 to $27.13 487,540 5.72 yrs. $26.01 302,640 $25.93
$29.25 to $35.50 365,850 7.48 yrs. $32.10 126,160 $30.78
------- -------
853,390 428,800
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: risk-free
rates of 4.58% and 5.12% for options issued in 1999, 5.56% and 5.64% for
options issued in 1998, 6.32% and 6.73% for options issued in 1997; expected
dividend yields of 6.66%, 5.43%, and 5.10%; expected lives of 6.21, 6.00, and
6.15 years; and expected volatility of 20.45%, 19.01%, and 16.65%.
Employee Savings Plans Substantially all employees of the Company are
eligible to participate in employee savings plans. Under these plans, a
percentage of an employee's pay may be contributed to various savings
alternatives including, under one plan, investment in the Company's common
stock. The plans call for the Company to match the employee's contribution
under various formulae. Charges to income related to such Company matching
were $0.6 million in 1999, $0.7 million in 1998, and $0.6 million in 1997.
13-18
19
<PAGE>
Exhibit 13
10. Business Segments
The Company and its subsidiaries are engaged principally in the business of
selling workers compensation and other insurance. The Company's insurance
subsidiaries are authorized to sell a portfolio of workers compensation,
commercial and homeowners multi-peril, automobile liability and physical damage,
medical malpractice, fire, and other lines in all states and the District of
Columbia. On June 30, 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 131 "Disclosures About
Segments of an Enterprise and Related Information" effective for fiscal years
beginning after December 15, 1997. In accordance with the selection criteria
established by SFAS 131, the Company has identified and disclosed as business
segments the lines of business considered significant to the company as a whole.
Net pre-tax underwriting loss represents net earned premium less operating
expenses for each segment, and excludes general corporate expenses and other
income and expenses of a general corporate nature. Depreciation, capital
expenditures, and other assets are not identifiable with any particular segment.
Other general corporate assets consist principally of investments (fixed
maturities and equity securities) and receivables (reinsurance, agents balances
and accrued retrospective premiums).
There are no major customers from whom the Company derives 10% or more of its
revenue.
Information on the Company's business segments for the years ended December 31
is as follows.
<TABLE>
<CAPTION>
In millions 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earned premiums:
Workers compensation $ 65.7 $115.6 $140.6
Other lines 27.3 22.9 24.3
Run off lines - - -
- -------------------------------------------------------------------------------
Net earned premiums $ 93.0 $138.5 $164.9
===============================================================================
Pre-tax underwriting income (loss):
Workers compensation $(80.6) $(24.1) $(20.9)
Other lines (10.6) (7.1) (8.7)
Run off lines (0.9) 0.6 2.4
- -------------------------------------------------------------------------------
Total pre-tax underwriting loss (92.1) (30.6) (27.2)
General corporate expenses (4.7) (4.5) (3.2)
Net investment income 68.5 77.4 87.2
Gains on sales of investments 2.8 51.2 4.5
Provision for income taxes (10.3) 30.8 12.8
- -------------------------------------------------------------------------------
Net (loss) income $(15.2) $ 62.7 $ 48.5
===============================================================================
</TABLE>
13-19
20
<PAGE>
Exhibit 13
11. Commitments and Contingencies
Rental expenses for operating leases, principally for offices, were $4.0
million, $4.2 million, and $4.0 million in 1999, 1998, and 1997, respectively.
As of December 31, 1999, future minimum noncancellable operating lease
commitments are as follows: $3.8 million in 2000, $3.1 million in 2001, $2.3
million in 2002, $1.3 million in 2003, $2.3 million in 2004 and thereafter for a
total of $12.7 million.
The Company's insurance subsidiaries are members of the statutorily created
insolvency guarantee associations in all states where they are authorized to
transact business. These associations were formed for the purpose of paying the
claims of insolvent companies. The Company is assessed its pro rata share of
such claims based on its premium writings, subject to a maximum annual
assessment per line of insurance. Such costs can generally be recovered through
surcharges on future premiums. The Company does not believe that assessments on
current insolvencies will have a material effect on its financial condition or
results of operations.
On August 30, 1996, the Los Angeles County Metropolitan Transportation Authority
(MTA) filed a civil action against the Company alleging breach of contract,
breach of the covenant of good faith and fair dealing, and requesting ancillary
relief in the form of an accounting, an injunction and restitution in connection
with allegations regarding failures to perform under certain contracts of
insurance. The MTA contends that it has been damaged by an unspecified amount.
The Company has responded to the Complaint, and brought certain counterclaims
against the MTA, and possibly others, in connection with the facts underlying
the lawsuit. The Company believes it has meritorious defenses, and intends to
vigorously contest these claims. The Company is unable, with any degree of
certainty, to comment upon the range of any potential loss, or whether such an
outcome is probable or remote, in light of the limited discovery conducted in
the case, and the preliminary investigation conducted thus far.
The Company has been sued in sixteen lawsuits brought on behalf of alleged
classes of purchasers of retrospectively rated workers compensation insurance,
alleging that the defendants, including other compensation insurers, charged the
purported class unlawful premiums. Plaintiffs have threatened to bring similar
claims against the Companies in several other states. The Companies intend to
vigorously defend these lawsuits. Management is unable to determine the
potential financial impact of these lawsuits at this time.
The insurance subsidiaries of the Company are parties to legal actions
incidental to their business. Based on the advice of counsel, management of the
Company believes that the resolution of these matters will not materially affect
the Company's financial condition or results of operations.
13-20
21
<PAGE>
Exhibit 13
12. Run Off Lines
Although the Company has discontinued active underwriting of hospital liability,
medical malpractice liability, and assumed casualty reinsurance, these lines are
in run off status, meaning that the Company is still obligated to pay losses
incurred on policies written in past years. Each of these lines is characterized
by long elapsed periods between the occurrence of a claim and ultimate payment
of the settled claim. The Company has a specialized and dedicated staff to
administer and settle claims related to these run off lines. The following
tables present the Company's reserves for losses and loss adjustment expenses
and their underwriting loss, including detailed information for the years ended
December 31.
<TABLE>
<CAPTION>
Reserves for Losses and Loss Adjustment Expenses
In millions 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Run off lines:
Reinsurance assumed $201.4 $213.0 $ 217.8
Medical malpractice 27.5 29.0 54.4
- -------------------------------------------------------------------------------
228.9 242.0 272.2
Continuing lines 668.5 693.8 791.0
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Total reserves $897.4 $935.8 $1,063.2
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
underwriting income (loss)
In millions 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Run off lines:
Reinsurance assumed $ (1.3) $(1.3) $ 0.4
Medical malpractice 0.4 1.9 2.0
- -------------------------------------------------------------------------------
(0.9) 0.6 2.4
Continuing lines (91.2) (31.2) (29.6)
- -------------------------------------------------------------------------------
Total underwriting loss $(92.1) $(30.6) $(27.2)
- -------------------------------------------------------------------------------
</TABLE>
13. Permitted Statutory Accounting Practices
The Company's insurance subsidiaries prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted by
the insurance departments of the state in which they are domiciled. Prescribed
statutory accounting practices include a variety of publications of the National
Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed but which the
appropriate regulatory agency has allowed in practice.
The Company's insurance subsidiaries do not apply any permitted statutory
accounting practices, which individually or in the aggregate materially affect
statutory surplus or risk-based capital.
13-21
22
<PAGE>
Exhibit 13
Quarterly Financial Data -- Unaudited
The following table represents unaudited quarterly financial data for the years
ended December 31, 1999 and 1998. In the opinion of management, all adjustments
necessary to present fairly the results of operations for such periods have been
made. Total revenues and net income include gains on the sale of investments.
The Company cannot anticipate when or if similar gains may occur in the future.
Since financial results rely heavily on estimates, caution should be used in
drawing specific conclusions from quarterly consolidated results.
<TABLE>
<CAPTION>
In millions except per share amounts Three Months Ended
- ------------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
1999
<S> <C> <C> <C> <C>
Total revenues $ 46.1 $51.4 $ 45.3 $ 21.5
Underwriting loss (3.6) (5.8) (10.6) (72.1)
Net income (loss) 9.5 7.2 5.0 (36.9)
Net income (loss) per common share
Basic* 0.40 0.30 0.21 (1.63)
Diluted* 0.40 0.30 0.21 (1.63)
Comprehensive income (loss) (7.1) 10.8 (17.6) (29.9)
1998
Total revenues $98.0 $56.3 $ 60.4 $52.4
Underwriting loss (7.6) (5.0) (10.5) (7.5)
Net income 36.7 8.8 10.4 6.8
Net income per common share
Basic* 1.54 0.37 0.43 0.28
Diluted* 1.52 0.36 0.43 0.28
Comprehensive income 23.5 14.5 14.1 19.6
- -------------------------------------------------------------------------------------
</TABLE>
*Basic and diluted earnings per share are computed independently for each
quarter and the full year based on the respective average number of common
shares outstanding; therefore, the sum of the quarterly net income per share
data may not equal the net income per share for the year.
<TABLE>
<CAPTION>
Common Stock Market Prices - unaudited
The following table shows the high, low, and closing prices during each quarter
in the past two years.
Quarter Ended March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C>
1999
High 27 1/2 27 15/16 26 5/8 26
Low 23 3/4 23 23 9/16 18 11/16
Close 25 11/16 24 25 1/8 19 7/8
1998
High 37 1/2 37 33 1/8 27 7/8
Low 31 30 24 21 1/4
Close 36 1/8 31 5/8 25 1/2 24 1/2
</TABLE>
13-22
23
<PAGE>
Exhibit 13
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results of Operations Earned premium income decreased to $93.0 million for the
year ended December 31, 1999, from $138.5 million in 1998, and from $164.9
million recorded in 1997. This decline resulted from two primary factors: During
the fourth quarter, an actuarial review determined that the estimate for
additional premiums accrued under retrospectively rated policies was overstated
for older policy years by approximately $20 million. The adjustment of this
estimate is a decrease to earned premiums for the quarter and the current year.
Also, severe price competition for workers compensation insurance, the Company's
primary line of business continued to make many accounts less attractive during
1999. The impact of large deductible programs on inforce premium was $62.0
million in 1999 as compared with $95.3 million in 1998.
Net investment income was $68.5 million, $77.4 million, and $87.2 million for
1999, 1998, and 1997, respectively. This decline reflects fluctuations in market
values and the reduction of portfolio 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.
Pre-tax gains on sales of investments were $2.8 million, $51.2 million, and $4.5
million for 1999, 1998, and 1997, respectively. The 1998 gain resulted primarily
from the call of Navistar International Series D preferred stock and from
resolution of class action litigation related to investment trades in prior
years. Management cannot anticipate when or if similar gains or losses may occur
in the future.
Losses and loss adjustment expenses were $121.4 million, $95.1 million and
$112.8 million in 1999, 1998, and 1997, respectively. Incurred losses for 1999
include an increase to workers compensation reserves during the fourth quarter
of $31.7 million, reflecting higher than anticipated loss development for
accident years 1998 and 1999, particularly in California. The Company's loss
ratio, including the run off lines of business, was 132% in 1999, 69% in 1998,
and 68% in 1997. The loss ratio in the workers compensation line of business was
143% in 1999 and 65% in both 1998 and 1997. The loss ratio in other continuing
lines of business was 102%, 87%, and 94% in 1999, 1998, and 1997, respectively.
In the opinion of management, the Company's reserves represent the Company's
best estimate of its ultimate liabilities, based on currently known facts,
current law, current technology, and assumptions considered reasonable where
facts are not known. Due to significant uncertainties and related management
judgments, however, there can be no assurance that future loss development,
favorable or unfavorable, will not occur.
Underwriting expenses totaled $64.6 million in 1999, $74.9 million in 1998, and
$80.6 million in 1997. Underwriting expenses are composed of four components:
general expenses, commissions, premium taxes, and state fees and assessments.
The $10.3 million decrease in expenses from the prior year is attributed to the
reduction in compensation and fringe benefits paid in 1999, and non-recurring
expenses related to Year 2000 remediation incurred in 1998.
Policyholder dividend expense (recapture) was $1.0 million in 1999, $0.8 million
in 1998, and $(0.9) million in 1997. These charges reflect the loss experience
of participating policyholders, the basis for dividend payments. Since the
advent of open rating in 1995 in California, fewer participating policies are
being written.
After-tax operating loss was $15.2 million in 1999 compared to operating income
of $62.7 million in 1998 and $48.5 million in 1997. The after-tax loss in 1999
was a result of the reduction in earned premium and strengthening of loss
reserves discussed above.
Liquidity and Capital Resources The Company's insurance subsidiaries require a
significant degree of liquidity and adequate capital to meet ongoing obligations
to policyholders and claimants, and to cover ordinary operating expenses. During
the three years ended December 31, 1999, the Company generated sufficient
capital from operating and investment income to meet all of its obligations. The
Company maintains adequate levels of liquidity and surplus capacity to manage
the risks inherent with any differences between the duration of its liabilities
and invested assets. Management believes that the Company continues to maintain
sufficient liquidity to pay claims and expenses, as well as to cover unforeseen
events such as reinsurer insolvencies, inadequate premium rates, or reserve
deficiencies.
13-23
24
<PAGE>
Exhibit 13
In addition to its investment portfolio, subsidiaries of Argonaut Group own real
property for use as Home Office facilities for Argonaut Insurance Company and
Argonaut Great Central, as well as three commercial properties in California.
These real properties are included in "Other Assets" at $5 million; their
original cost less accumulated depreciation. The market value for these
properties is estimated at between $98 and $113 million.
Under provisions of the California Insurance Code, there is a maximum amount of
dividends which can be paid without prior approval of the Insurance
Commissioner, reduced by dividends declared during the prior twelve months.
Under these provisions, as of December 31, 1999, Argonaut Insurance could pay to
Argonaut Group, Inc. a maximum dividend of $600,000 without the Insurance
Commissioner's approval. During 1999, Argonaut Insurance paid the Company
dividends of $66.4 million.
The quarterly dividend to shareholders of Argonaut Group for 1999 was $0.41 per
common share. During 1999, total cash dividends paid by the Company to its
shareholders were $1.64 per share. On January 22, 2000, the Argonaut Group, Inc.
Board of Directors declared a quarterly common stock dividend of $0.41 per
common share, payable February 23 to shareholders of record February 8, 2000.
During 1999 under its previously announced stock repurchase program the Company
purchased an additional 1,735,300 shares bringing the total shares repurchased
to 7,150,988 out of an aggregate authorization of eight million shares. It is
presently expected that dividends received from the Company's subsidiaries will
be the primary source of funds for the stock repurchase program and to meet any
other capital requirements the Company may develop.
Recently Issued Accounting Pronouncements As discussed in Note 1 to the
Consolidated Financial Statements, the Company has reviewed Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivatives
and Hedging Activities". The statement will not have a material effect on
the Company's results of operations or financial condition. An amendment
to the statement, SFAS No. 137 defers the effective date of SFAS no. 133 for the
Company to January 1, 2001.
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. At December 31, 1999 the fair market
value of the Company's common stock was $427.1 million. The potential loss in
fair value at December 31, 1999 using a 10% hypothetical decline in prices, is
estimated to be approximately $42.7 million.
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. The following interest rate sensitivity analysis measures
the potential change in fair value for the Company's fixed maturity investments
and preferred stock as of December 31, 1999 resulting from changes in the rate
of 100 and 200 basis points.
13-24
25
<PAGE>
Exhibit 13
Interest Rate Sensitivity Analysis
Fair Yield Modified
Value To Duration
(Millions) Maturity (Years)
- -200bp 867.3 5.5% 6.4
- -100bp 871.8 6.1% 6.3
Base Case 806.7 7.1% 6.1
+100bp 761.3 8.1% 5.7
+200bp 717.1 9.1% 5.5
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.
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 will continue through the
quarter end of March 2000.
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.
13-25
1
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K and into the Company's previously filed Registration
Statement File No. 33-12034 and 33-31547, of our report dated January 21, 2000,
included in Argonaut Group, Inc.'s 1999 Annual Report to Shareholders. It should
be noted that we have not audited any consolidated financial statements of the
Company subsequent to December 31, 1999 or performed any audit procedures
subsequent to the date of our report.
ARTHUR ANDERSEN LLP
San Francisco, California
March 21, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 745
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 427
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1176
<CASH> 31
<RECOVER-REINSURE> 27
<DEFERRED-ACQUISITION> 3
<TOTAL-ASSETS> 1625
<POLICY-LOSSES> 897
<UNEARNED-PREMIUMS> 44
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2
<OTHER-SE> 626
<TOTAL-LIABILITY-AND-EQUITY> 1625
93
<INVESTMENT-INCOME> 69
<INVESTMENT-GAINS> 3
<OTHER-INCOME> 0
<BENEFITS> 121
<UNDERWRITING-AMORTIZATION> 3
<UNDERWRITING-OTHER> 66
<INCOME-PRETAX> (25)
<INCOME-TAX> (10)
<INCOME-CONTINUING> (91)
<DISCONTINUED> (1)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15)
<EPS-BASIC> (1)
<EPS-DILUTED> (1)
<RESERVE-OPEN> 936
<PROVISION-CURRENT> 118
<PROVISION-PRIOR> 57
<PAYMENTS-CURRENT> 36
<PAYMENTS-PRIOR> 178
<RESERVE-CLOSE> 897
<CUMULATIVE-DEFICIENCY> (94)
</TABLE>
