FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-14950
Argonaut Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 95-4057601
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 Middlefield Road, Menlo Park 94025
(Address of principal executive offices) (Zip code)
650.858.6600
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of October 30, 2000.
Title Outstanding
Common Stock, par value $.10 per share 22,001,118
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ARGONAUT GROUP, INC.
TABLE OF CONTENTS
Page No.
Part I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999....................3
Consolidated Statements of Operations and Comprehensive Income
Three and nine months ended September 30, 2000 and 1999.....4
Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999..............5
Notes to Condensed Consolidated Financial Statements.......6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..........8
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings.........................................9
Item 6. Exhibits and Reports on Form 8-K.............................9
Signatures...........................................................10
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Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions except per share amounts)
Sep 30, 2000 Dec 31, 1999
(unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at fair value $709.1 $745.4
(cost: 2000 - $725.4; 1999 - $775.8)
Equity securities, available for sale, at fair value 363.7 427.1
(cost: 2000 - $179.4; 1999 - $202.2)
Short-term investments, available for sale, at fair 14.9 0.8
value
Securities in transit 1.9 2.6
-------------- ---------------
-------------- ---------------
1,089.6 1,175.9
Cash and cash equivalents 13.5 31.2
Accrued investment income 11.4 16.2
Receivables:
Due from insureds 100.0 92.8
Due from reinsurance 220.9 218.3
Accrued retrospective premiums 17.5 31.0
Cost in excess of net assets purchased 30.6 32.7
Unearned premiums on ceded reinsurance 2.8 1.2
Accrued policyholder dividends recaptured 3.0
-
Deferred Federal income tax asset, net 45.1 10.3
Other assets 9.5 12.5
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-------------- ---------------
$1,540.9 $1,625.1
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LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss adjustment expenses $908.3 $897.4
Unearned premiums 42.6 43.9
Accrued policyholder dividends 1.8
-
Other liabilities 54.9 55.4
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-------------- ---------------
1,007.6 996.7
-------------- ---------------
-------------- ---------------
Shareholders' equity:
Common stock - $.10 par, 35,000,000
shares authorized, 22,002,131 and
22,359,816 shares issued and outstanding
at June 30, 2000 and December 31, 1999,
respectively 2.2 2.2
Additional paid-in capital 95.4 96.8
Retained earnings 326.4 403.0
Net unrealized appreciation on securities 109.3 126.4
-------------- ---------------
-------------- ---------------
533.3 628.4
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-------------- ---------------
$1,540.9 $1,625.1
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============== ===============
See accompanying notes
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Argonaut Group Inc. and Subsidiaries
Consolidated Statements of Operations
(In millions except amounts per share) For the Quarter For the Nine Months
(unaudited) Ended September 30, Ended September 30,
--------------------------- ---------------------------
--------------------------- ---------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Premiums and other revenue:
Premiums, net $32.8 $27.2 $93.0 $88.4
Net investment income 15.3 17.2 47.3 52.1
Gains on sales of investments 2.4 0.9 22.5 2.3
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------------ ------------ ------------ -------------
Total revenue 50.5 45.3 162.8 142.8
Expenses:
Losses and loss adjustment expenses 28.8 23.2 169.2 62.1
Underwriting, acquisition, and
insurance expenses 20.7 14.3 55.0 46.2
Amortization of cost in excess of
net assets purchased 0.7 0.7 2.1 2.1
Policyholder dividends 2.1 0.2 5.6 0.7
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------------ ------------ ------------ -------------
Total expenses 52.3 38.4 231.9 111.1
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Income (loss) before tax (1.8) 6.9 (69.1) 31.7
Provision (benefit) for taxes (0.9) 1.9 (24.8) 10.0
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------------ ------------ ------------ -------------
Net income (loss) ($0.9) $5.0 ($44.3) $21.7
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Income (loss) per common share:
Basic ($0.04) $0.21 ($2.00) $0.91
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Diluted ($0.04) $0.21 ($2.00) $0.91
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Dividends declared per common share: $0.41 $0.41 $0.41 $0.41
============ ============ ============ =============
============ ============ ============ =============
Weighted average common shares:
Basic 22,001,185 23,688,252 22,136,779 23,891,340
============ ============ ============ =============
============ ============ ============ =============
Diluted 22,001,185 23,693,321 22,136,779 23,897,177
============ ============ ============ =============
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<CAPTION>
Argonaut Group Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In millions except amounts per share) For the Quarter For the Nine Months
(unaudited) Ended September 30, Ended September 30,
--------------------------- ---------------------------
--------------------------- ---------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net income (loss) ($0.9) $5.0 ($44.3) $21.7
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Gains (losses) arising during the period 21.0 (33.8) (3.8) (52.5)
Reclassification adjustment for gains included
in net income or net (2.4) (0.9) (22.5) (2.3)
loss
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Other comprehensive income (loss) before tax 18.6 (34.7) (26.3) (54.8)
Income tax expense related to other
Comprehensive income (loss) 6.5 (12.1) (9.2) (19.2)
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Other comprehensive income (loss), net of tax 12.1 (22.6) (17.1) (35.6)
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------------ ------------ ------------ -------------
Comprehensive income (loss) $11.2 ($17.6) ($61.4) ($13.9)
============ ============ ============ =============
See accompanying notes
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<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
(unaudited)
For the Nine Months
Ended September 30,
--------------------------
--------------------------
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($44.3) $21.7
Adjustments to reconcile net income (loss) to net cash provided (used) by
operations:
Amortization and depreciation 3.9 5.2
Deferred federal income tax provision (benefit) (25.5) 6.2
Gains on sales of investments (22.5) (2.3)
Decrease in accrued investment income 4.8 5.1
Increase in receivables from insureds (7.2) (37.0)
Increase in reinsurance receivables (2.6) (19.7)
Decrease in accrued retrospective premiums 13.5 4.4
Increase in unearned premiums on ceded reinsurance (1.6) (0.2)
Decrease (increase) in accrued policyholder dividends recaptured 4.8 (0.4)
Increase (decrease) in reserves for losses and
loss adjustment expenses 10.9 (18.5)
Increase (decrease) in unearned premiums (1.3) (3.2)
Increase (decrease) in income taxes payable 7.1 (2.9)
Decrease in other assets and liabilities, net (5.7) (19.7)
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------------ ------------
(21.4) (83.0)
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------------ ------------
Cash flows from investing activities:
Sales of fixed maturity investments 35.0 61.0
Maturities and mandatory calls of fixed maturity investments 16.8 56.8
Sales of equity securities 72.1 11.6
Purchases of fixed maturity investments (2.0) (13.9)
Purchases of equity securities (26.8) (14.2)
Decrease (increase) in short-term investments (14.1) 7.0
Other, net 0.7 1.2
------------ ------------
------------ ------------
81.7 109.5
------------ ------------
------------ ------------
Cash flows from financing activities:
Repurchase of common stock (6.4) (31.3)
Payment of cash dividend (27.3) (29.5)
Exercise of stock options - 0.7
------------ ------------
------------ ------------
(33.7) (60.1)
------------ ------------
------------ ------------
Decrease in cash and cash equivalents (17.7) (11.9)
Cash and cash equivalents, beginning of period 31.2 24.5
------------ ------------
------------ ------------
Cash and cash equivalents, end of period $13.5 $12.6
============ ============
============ ============
See accompanying notes
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated balance sheet as of September 30, 2000, and the related
consolidated statements of income for the three and nine month periods ended
September 30, 2000 and 1999 and the statements of cash flows for the nine month
periods ended September 30, 2000 and 1999 are unaudited, and, in the opinion of
management, include all adjustments which are necessary for a fair presentation
of such statements. Such adjustments consist of only normal recurring items.
Interim results are not necessarily indicative of results for other interim
periods or for a full year. Certain prior year balances have been reclassified
to conform to the current year presentation.
These unaudited consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes that are included in the
Company's Annual Report to Stockholders on Form 10K for the fiscal year ended
December 31, 1999.
Note 2 - Dividends Declared
On October 24, 2000 the Company declared a regular quarterly cash dividend of
$0.41 per common share payable to shareholders of record on November 14, 2000.
The dividend will be paid on November 28, 2000.
Note 3 - Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. SFAS No. 133 was to be effective for fiscal
years beginning after June 15, 1999. In May 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133", that amends SFAS No. 133 and defers the
effective date to fiscal years beginning after June 15, 2000. Management of the
Company does not believe the adoption of SFAS No. 133 will have a material
impact on the Company's results of operations or financial position when
adopted.
Note 4 - Contingencies: Litigation
Argonaut Insurance Company is a defendant in a case entitled Diamond Woodworks
vs. Argonaut Insurance Company, in the Superior Court of Orange County,
California. The case arose out of Argonaut's alleged mishandling of a workers
compensation claim and alleged fraudulent acts towards the plaintiff. On June
19, 2000 the jury awarded approximately $700,000 in compensatory damages and $14
million in punitive damages against the Company, which verdict was subsequently
confirmed by the Court. The Company has filed post judgment motions to overturn
or reduce the judgments. The Company intends to vigorously pursue an appeal of
an adverse final judgment, and has posted a surety bond for the judgement
pending appeal. The Company has recorded the $700,000 judgment for compensatory
damages but has not recorded the $14 million judgment for punitive damages.
Management is currently unable to estimate the amount (if any) of punitive
damages that will be awarded.
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Note 5 - Reserves for Losses and Loss Adjustment Expenses
The following table provides a reconciliation of reserves for direct and assumed
losses and loss adjustment expenses for September 30, 2000 and 1999. Ceded
incurred losses and loss adjustment expenses were 21.1 million and 30.6 million
for the periods ended September 30, 2000 and 1999 respectively.
For the Nine Months
Ended September 30,
-----------------------------
In millions 2000 1999
<S> <C> <C>
Reserves for losses and loss
adjustment expenses at
beginning of period $897.4 $935.8
Losses and loss adjustment expenses:
Provision for losses and loss
Adjustment expenses for claims
Occurring in the current period 102.2 104.3
Increase in estimated
losses and loss adjustment expenses
for claims occurring in prior periods 88.1 (11.6)
------------ -------------
190.3 92.7
Losses and loss adjustment expense payments
for claims occurring during:
Current period 25.7 17.8
Prior periods 153.7 133.3
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179.4 151.1
Reserves for losses and loss
adjustment expenses at end of period $908.3 $877.4
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Operating Results
The Company reported a consolidated net loss of $900,000 ($0.04 per diluted
common share) on total revenue of $50.5 million for the third quarter of 2000,
compared to consolidated income of $5.0 million ($0.21 per diluted common share)
on total revenue of $45.3 million for the same quarter last year. For the nine
months ended September 30, 2000, the Company recorded a consolidated net loss of
$44.3 million ($2.00 per diluted common share) on total revenue of $162.8
million, compared to a net income of $21.7 million ($0.91 per diluted common
share) on total revenue of $142.8 million for the same period in 1999.
Consolidated operating loss after tax was $2.5 million for the quarter ended
September 30, 2000, compared to a consolidated operating income of $4.4 million
for the same period last year. For the nine months ended September 30, 2000, the
consolidated operating loss after tax was $58.9 million, compared to
consolidated operating income of $20.2 million for the same nine-month period
last year. Operating income excludes gains on the sale of investments.
Total revenue includes gains on sales of investments of $2.4 million for the
current quarter, compared with $900,000 for the third quarter of 1999. For the
nine months ended September 30, 2000, gains on sales of investments were $22.5
million, compared with $2.3 million for the same period last year.
Although net written premiums are up 26% over the third quarter of 1999, and up
16% year to date, inadequate pricing of the inforce business continues to
produce high loss ratios. Expenses also increased in the quarter by $3 million
from the reduction of the asset carried for deferred policy acquisition costs.
Under its stock repurchase program announced in 1989, the Company has acquired
7,463,236 out of an aggregate authorization of eight million shares. As of
September 30, 2000, 22,001,118 common shares were outstanding, compared with
22,359,816 shares as of December 31, 1999.
Shareholders' equity per common share at September 30, 2000 was $24.24, compared
with $24.14 at June 30, and $28.10 at December 31, 1999.
Market Risk
The primary market risk exposures that result in an impact to the Company's
investment portfolio relates to equity price changes and interest rate changes.
The Company does not have any foreign currency risk, debt or derivative
instruments.
The Company holds a well diversified portfolio of investments in common stock
representing U.S. firms in industries and market segments ranging from small
market capitalization stocks to the Standard & Poors 500 stocks. Equity price
risk is managed primarily through the daily monitoring of funds committed to the
various types securities owned by the Company and by limiting the exposure in
any one investment or type of investment.
The Company's primary exposure to interest rate risk relates to its fixed
maturity investments including redeemable preferred stock. Changes in market
interest rates directly impact the market value of the fixed maturity securities
and preferred stocks.
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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, corporate bonds, and preferred stocks) with a short horizon (10 year
maximum). The Company also purchases common stocks through an Investment
Manager.
Management has assessed these risks and feels that there has been no material
change since December 31, 1999.
Liquidity and Capital Resources
The liquidity requirements of the Company have been met by funds provided from
premiums and investment income as well as sales and maturities of invested
assets. The primary use of funds was to pay claims, policy benefits, operating
expenses, and commissions, to purchase new investments, pay dividends to
shareholders and repurchase shares of its outstanding common stock.
Management believes that the Company maintains sufficient liquidity to pay
claims and expenses. Management also believes that the Company possesses
adequate capital resources to cover unforeseen events such as reinsurer
insolvencies, inadequate premium rates, or reserve deficiencies.
Part II. Other Information
Item 1. Legal Proceedings
Reference is made to Item 3 of the Company's Annual Report to Stockholders on
Form 10-K for the fiscal year ended December 31, 1999 and to Footnote 4 of this
Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K.
1. Exhibit 27, Financial Data Schedule for September 30, 2000, Form 10-Q.
2. During the quarter covered by this report, the Registrant did not file
any reports on Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Argonaut Group, Inc.
(Registrant)
/s/ Mark E. Watson, III
---------------------------------------
Mark E. Watson, III
President (principal executive
officer)
/s/ James B Halliday
James B Halliday
Vice President and Treasurer
(principal financial and
accounting officer)
November 1, 2000
