SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
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.)
10101 Reunion Place, Suite 500, San Antonio, Texas 78216
(Address of principal executive offices) (Zip code)
(210) 321-8400
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of August 14, 2002.
Title Outstanding
Common Stock, par value $0.10 per share 21,570,988
ARGONAUT GROUP, INC.
TABLE OF CONTENTS
Page No.
Part I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001....................... 3
Consolidated Statements of Operations
Three and six months ended June 30, 2002 and 2001......... 4
Consolidated Statements of Comprehensive Income (Loss)
Three and six months ended June 30, 2002 and 2001......... 5
Consolidated Statements of Cash Flow
Six months ended June 30, 2002 and 2001................... 6
Notes to Condensed Consolidated Financial Statements....... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 13
Item 3. Market Risks............................................... 19
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings.......................................... 20
Item 2. Changes in Securities and Use of Proceeds.................. 21
Item 3. Default Upon Senior Securities............................. 21
Item 4. Submission of Matters to a vote of Security Holders........ 21
Item 5. Other Information.......................................... 22
Item 6. Exhibits and Reports on Form 8K .......................... 22
Signatures......................................................... 23
2
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
June 30, December 31,
2002 2001
----------------- -----------------
(Unaudited)
Assets
Investments:
Fixed maturities, available for sale, at fair value $ 801.2 $ 779.4
(cost: 2002 - $780.1; 2001 - $767.1)
Equity securities, available for sale, at fair value 326.6 326.3
(cost: 2002 - $178.3; 2001 - $175.6)
Other long term, at fair value 4.8 4.8
(cost: 2002 - $5.4; 2001 - $5.2)
Short-term investments, at fair value 43.6 42.7
----------------- -----------------
Total investments 1,176.2 1,153.2
----------------- -----------------
Cash and cash equivalents 13.8 14.0
Accrued investment income 12.9 12.5
Receivables:
Due from insureds 201.5 187.9
Due from reinsurance 254.7 256.5
Goodwill 100.2 102.4
Deferred federal income tax asset, net 70.0 78.1
Deferred acquisition costs 31.9 22.3
Prepaid assets 3.8 3.7
Other assets 45.7 32.6
----------------- -----------------
Total assets $ 1,910.7 $ 1,863.2
================= =================
Liabilities and Shareholders' Equity
Reserves for losses and loss adjustment expenses $ 1,140.9 $ 1,147.8
Unearned premiums 201.1 163.7
Accrued underwriting expenses and funds held 72.9 65.0
Income taxes payable, net 1.9 5.0
Other liabilities 35.0 34.2
----------------- -----------------
Total liabilities 1,451.8 1,415.7
----------------- -----------------
Shareholders' equity:
Common stock - $0.10 par, 35,000,000 shares authorized 21,566,488 and
21,557,238 shares issued and outstanding
at June 30, 2002 and December 31, 2001, respectively 2.2 2.2
Additional paid-in capital 96.1 93.6
Retained earnings 253.0 246.0
Deferred Stock Compensation (2.1) -
Accumulated other comprehensive income 109.7 105.7
----------------- -----------------
Total shareholders' equity 458.9 447.5
----------------- -----------------
Total liabilities and shareholders' equity $ 1,910.7 $ 1,863.2
================= =================
See accompanying notes.
3
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
----------------------------- ----------------------------
June 30, June 30,
2002 2001 2002 2001
-------------- ------------- ------------- -------------
Premiums and other revenue:
Earned premiums $ 84.0 $ 37.9 $ 168.6 $ 67.5
Net investment income 13.8 12.8 27.1 26.5
Gains on sales of investments 5.9 5.0 14.0 7.1
-------------- ------------- ------------- -------------
Total revenue 103.7 55.7 209.7 101.1
-------------- ------------- ------------- -------------
Expenses:
Losses and loss adjustment expenses 61.6 34.4 124.2 60.8
Underwriting, acquisition, and
insurance expenses 32.8 18.6 65.4 38.0
-------------- ------------- ------------- -------------
Total expenses 94.4 53.0 189.6 98.8
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Income (loss) before income taxes 9.3 2.7 20.1 2.3
Provision (benefit) for income taxes 3.2 0.8 6.5 0.1
-------------- ------------- ------------- -------------
Net income $ 6.1 $ 1.9 $ 13.6 $ 2.2
============== ============= ============= =============
Net income per common share:
Basic $ 0.28 $ 0.09 $ 0.63 $ 0.10
============== ============= ============= =============
Diluted $ 0.28 $ 0.09 $ 0.63 $ 0.10
============== ============= ============= =============
Dividends declared per common share: $ 0.15 $ 0.41 $ 0.30 $ 0.82
============== ============= ============= =============
Weighted average common shares:
Basic 21,563,823 21,581,259 21,560,847 21,657,456
============== ============= ============= =============
Diluted 21,698,566 21,587,442 21,677,658 21,659,499
============== ============= ============= =============
See accompanying notes.
4
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
(Unaudited)
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income $ 6.1 $ 1.9 $ 13.6 $ 2.2
------------ ------------ ------------ ------------
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Gains (losses) arising during the period 5.3 6.4 20.2 (15.8)
Reclassification adjustment for gains included
in net income or loss (5.9) (5.0) (14.0) (7.1)
------------ ------------ ------------ ------------
Other comprehensive income (loss) before tax (0.6) 1.4 6.2 (22.9)
Income tax expense (benefit) related to other
comprehensive income (loss) (0.2) 0.5 2.2 (8.0)
------------ ------------ ------------ ------------
Other comprehensive income (loss), net of tax (0.4) 0.9 4.0 (14.9)
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 5.7 $ 2.8 $ 17.6 $ (12.7)
============ ============ ============ ============
See accompanying notes
5
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in millions)
(Unaudited)
Six Months Ended
--------------------------
June 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 13.6 $ 2.2
Adjustments to reconcile net income to
net cash provided (used) by operations:
Amortization and depreciation 6.9 3.0
Deferred federal income tax expense (benefit) 4.9 -
Gains on sales of investments (14.0) (7.1)
Change in:
Accrued investment income (0.4) 2.3
Receivables (11.8) (38.6)
Unearned premiums on ceded reinsurance (5.5) (3.1)
Reserves for losses and loss adjustment expenses (6.9) (14.3)
Unearned premiums 37.4 18.1
Other assets and liabilities, net (12.6) 7.6
------------ ------------
Cash provided (used) by operating activities 11.6 (29.9)
------------ ------------
Cash flows from investing activities:
Sales of fixed maturity investments 36.4 16.5
Maturities and mandatory calls of fixed maturity investments 40.5 275.5
Sales of equity securities 20.2 39.6
Purchases of fixed maturity investments (93.1) (144.7)
Purchases of equity securities (8.2) (10.8)
Change in short-term investments (0.9) (115.4)
Other, net (0.3) -
------------ ------------
Cash (used) provided by investing activities (5.4) 60.7
------------ ------------
Cash flows from financing activities:
Repurchase of common stock - (3.0)
Stock options exercised 0.1 -
Payment of cash dividend (6.5) (17.8)
------------ ------------
Cash used by financing activities: (6.4) (20.8)
------------ ------------
Change in cash and cash equivalents (0.2) 10.0
Cash and cash equivalents, beginning of period 14.0 7.2
------------ ------------
Cash and cash equivalents, end of period $ 13.8 $ 17.2
============ ============
Additional disclosure:
Income taxes paid $ 0.8 $ 0.6
============ ============
See accompanying notes
6
ARGONAUT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying Condensed Consolidated Financial Statements of Argonaut Group
Inc. and subsidiaries (collectively "Argonaut Group" or "the Company") have been
prepared in conformity with accounting principles generally accepted in the
United States of America (GAAP) for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Certain financial
information that is normally included in annual financial statements, including
certain financial statement footnotes, prepared in accordance with GAAP, is not
required for interim reporting purposes and has been condensed or omitted. These
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report to
Shareholders for the year ended December 31, 2001 (incorporated by reference in
Form 10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2001).
The interim financial data as of June 30, 2002 and 2001 and for the three and
six months ended June 30, 2002 and 2001 is unaudited. However, in the opinion of
management, the interim data includes all adjustments, consisting of normal
recurring accruals, necessary for a fair statement of the Company's results for
the interim periods. The operating results for the interim periods are not
necessarily indicative of the results to be expected for the full year. All
significant intercompany amounts have been eliminated. Certain amounts
applicable to prior periods have been reclassified to conform to the
presentation followed in 2002.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by GAAP for complete financial statements.
Note 2 - Recently Issued Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 establishes a
single accounting model for the impairment or disposal of long-lived assets and
new standards for reporting discontinued operations. SFAS No. 144 superseded
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The provisions of SFAS No. 144 are effective in fiscal years
beginning after December 15, 2001 and, in general, are to be applied
prospectively. The Company adopted the provisions of SFAS No. 144 effective
January 1, 2002. The adoption of this standard did not have a material impact on
the consolidated results of operations and financial position.
7
Note 3 - Earnings Per Share
The following table presents the calculation of basic and diluted net income per
common share for the three and six months ended June 30, 2002 and 2001.
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, June 30,
(Dollars in millions except per share data) 2002 2001 2002 2001
-------------- -------------- -------------- --------------
Net income $ 6.1 $ 1.9 $ 13.6 $ 2.2
============== ============== ============== ==============
Weighted average shares-basic 21,563,823 21,581,259 21,560,847 21,657,456
Effect of dilutive securities:
Stock options 134,743 6,183 116,811 2,043
-------------- -------------- -------------- --------------
Weighted average shares-diluted 21,698,566 21,587,442 21,677,658 21,659,499
============== ============== ============== ==============
Net income per common share-basic $ 0.28 $ 0.09 $ 0.63 $ 0.10
Net income per common share-diluted $ 0.28 $ 0.09 $ 0.63 $ 0.10
Note 4 - Reserves for Losses and Loss Adjustment Expenses
The following table provides a reconciliation of the beginning and ending
reserve balances for losses and loss adjustment expenses ("LAE"), net of
reinsurance, to the gross amounts reported in the balance sheet. Reinsurance
recoverables in this note exclude paid loss recoverables of $38.7 million and
$50.6 million as of June 30, 2002 and 2001, respectively.
Six Months Ended
June 30,
-----------------------
(Dollars in millions) 2002 2001
----------- -----------
Net reserves - beginning of year $ 929.6 $ 757.6
Add:
Loss and LAE incurred during current calendar year, net of reinsurance
Current accident year 123.9 62.3
Prior accident years 0.3 (1.5)
----------- -----------
Loss and LAE incurred during current calendar year, net of reinsurance 124.2 60.8
Deduct:
Loss and LAE payments made during current calendar year, net of reinsurance:
Current accident year 19.7 13.8
Prior accident years 109.1 77.8
----------- -----------
Loss and LAE payments made during current calendar year, net of reinsurance: 128.8 91.6
----------- -----------
Net reserves, end of period 925.0 726.8
Add
Reinsurance recoverable on unpaid losses & LAE, end of period 215.9 189.6
----------- -----------
Gross reserves - end of period $ 1,140.9 $ 916.4
=========== ===========
8
Note 5 - Other Assets
Other assets were comprised of the following:
June 30, December 31,
(Dollars in millions) 2002 2001
--------------- ---------------
Ceded unearned premiums $ 23.3 $ 17.8
Furniture, fixtures and equipment, net 14.6 10.7
Capital lease 1.4 1.4
Other 6.4 2.7
--------------- ---------------
Total other assets $ 45.7 $ 32.6
=============== ===============
Note 6 - Goodwill
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized but instead tested for impairment
at least annually. SFAS No. 142 also requires that intangible assets with finite
useful lives be amortized over their respective useful lives to their estimated
residual values. The Company fully adopted the provisions of SFAS No. 142
effective January 1, 2002.
Under SFAS No. 142, the Company is required to perform transitional impairment
testing as of the date of adoption. Step one of the transitional goodwill
impairment test, which compared the fair values of the Company's reporting units
to their respective carrying values, was completed during the six months ended
June 30, 2002. No impairment losses were identified as a result of these tests.
Therefore, step two of the goodwill impairment test, used to measure the amount
of impairment loss, was not required.
Had SFAS No.142 been adopted on the first day of 2001, amortization expense
would have been lowered by approximately $0.7 million and $1.4 million for the
three and six month periods ended June 30, 2001, respectively. In addition, net
income would have increased $0.7 million (or $0.03 per diluted share) to $2.6
million (or $0.12 per diluted share) for the three month period ended June 30,
2001, and $1.4 million (or $0.06 per diluted share) to $3.6 million (or $0.16
per diluted share) for the six month period then ended.
Note 7 - Business Segments
As of June 30, 2002, the Company's operations include four continuing business
segments: excess and surplus lines, specialty commercial, specialty workers'
compensation and public entity. The results of operations for the three and six
months ended June 30, 2002 include the activities of Colony Insurance Group,
included in the excess and surplus lines segment, and Rockwood Casualty
Insurance Group, included in the specialty commercial segment, both acquired by
the Company in the third quarter of 2001. Prior periods have been restated to
reflect the current segments.
9
The following is a summary of the operating results by business segment for the
three months ended June 30, 2002 and 2001:
For the three months ended
June 30,
Excess & Specialty
Surplus Specialty Workers' Public Run-off Corporate
(Dollars in millions) Lines Commercial Compensation Entity Lines & Other Total
----------- ------------- --------------- ---------- -------- ----------- -----------
2002
Premiums earned $ 30.9 $ 25.8 $ 25.4 $ 1.9 $ - $ - $ 84.0
Total expenses 30.2 25.7 34.4 2.1 0.6 1.4 94.4
----------- ------------- --------------- ---------- -------- ----------- -----------
Net underwriting
income (loss) 0.7 0.1 (9.0) (0.2) (0.6) (1.4) (10.4)
Investment income 2.7 2.4 8.2 0.1 - 0.4 13.8
----------- ------------- --------------- ---------- -------- ----------- -----------
Net operating
income (loss) $ 3.4 $ 2.5 $ (0.8) $ (0.1) $(0.6) $ (1.0) $ 3.4
----------- ------------- --------------- ---------- -------- ----------- -----------
Gains on sales of
investments --------------------------------------------------------------------------- 5.9
Provision for
income tax --------------------------------------------------------------------------- 3.2
-----------
Net income --------------------------------------------------------------------------- $ 6.1
===========
Excess & Specialty
Surplus Specialty Workers' Public Run-off Corporate
(Dollars in millions) Lines Commercial Compensation Entity Lines & Other Total
----------- ------------- --------------- ---------- -------- ----------- -----------
2001
Premiums earned $ - $ 8.5 $ 28.5 $ 0.9 $ - $ - $ 37.9
Total expenses - 10.5 40.8 1.1 - 0.6 53.0
----------- ------------- --------------- ---------- -------- ----------- -----------
Net underwriting
income (loss) - (2.0) (12.3) (0.2) - (0.6) (15.1)
Investment income - 1.2 11.6 - - - 12.8
----------- ------------- --------------- ---------- -------- ----------- -----------
Net operating
income (loss) $ - $ (0.8) $ (0.7) $ (0.2) $ - $ (0.6) $ (2.3)
----------- ------------- --------------- ---------- -------- ----------- -----------
Gains on sales of
investments --------------------------------------------------------------------------- 5.0
Provision for
income tax --------------------------------------------------------------------------- 0.8
-----------
Net income --------------------------------------------------------------------------- $ 1.9
===========
10
The following is a summary of the operating results by business segment for the
six months ended June 30, 2002 and 2001:
For the six months ended
June 30,
Excess & Specialty
Surplus Specialty Workers' Public Run-off Corporate
(Dollars in millions) Lines Commercial Compensation Entity Lines & Other Total
----------- ------------- --------------- ---------- -------- ----------- -----------
2002
Premiums earned $ 59.6 $ 50.7 $ 54.6 $ 3.7 $ - $ - $ 168.6
Total expenses 58.2 51.2 73.3 4.1 0.6 2.2 189.6
----------- ------------- --------------- ---------- -------- ----------- -----------
Net underwriting
income (loss) 1.4 (0.5) (18.7) (0.4) (0.6) (2.2) (21.0)
Investment income 4.8 5.0 16.6 0.3 - 0.4 27.1
----------- ------------- --------------- ---------- -------- ----------- -----------
Net operating
income (loss) $ 6.2 $ 4.5 $ (2.1) $ (0.1) $(0.6) $ (1.8) $ 6.1
----------- ------------- --------------- ---------- -------- ----------- -----------
Gains on sales of
investments --------------------------------------------------------------------------- 14.0
Provision for
income tax --------------------------------------------------------------------------- 6.5
-----------
Net income --------------------------------------------------------------------------- $ 13.6
===========
Excess & Specialty
Surplus Specialty Workers' Public Run-off Corporate
(Dollars in millions) Lines Commercial Compensation Entity Lines & Other Total
----------- ------------- --------------- ---------- -------- ----------- -----------
2001
Premiums earned $ - $ 16.6 $ 49.6 $ 1.3 $ - $ - $ 67.5
Total expenses - 21.4 74.4 1.8 - 1.2 98.8
----------- ------------- --------------- ---------- -------- ----------- -----------
Net underwriting
income (loss) - (4.8) (24.8) (0.5) - (1.2) (31.3)
Investment income - 2.5 24.0 - - - 26.5
----------- ------------- --------------- ---------- -------- ----------- -----------
Net operating
income (loss) $ - $ (2.3) $ (0.8) $ (0.5) $ - $ (1.2) $ (4.8)
----------- ------------- --------------- ---------- -------- ----------- -----------
Gains on sales of
investments --------------------------------------------------------------------------- 7.1
Provision for
income tax --------------------------------------------------------------------------- 0.1
-----------
Net income --------------------------------------------------------------------------- $ 2.2
===========
The following is a summary of identifiable assets by business segment as of
June 30, 2002 and December 31, 2001:
June 30, December 31,
(Dollars in millions) 2002 2001
--------------- ---------------
Excess & Surplus Lines 376.2 350.9
Specialty Commercial 338.1 307.2
Specialty Workers' Compensation 1,162.0 1,165.9
Public Entity 19.4 15.9
Run-off Lines - -
Corporate & Other 15.0 23.3
--------------- ---------------
Total Assets 1,910.7 1,863.2
=============== ===============
11
Note 8 - Deferred Stock Compensation
The Shareholders approved the 2002 Amended and Restated Stock Incentive Plan
("the Plan") on April 30, 2002, which resulted in 89,600 shares of restricted
stock which were provisionally granted to become effective on that date. On May
1, 2002, an additional 12,000 shares of restricted stock were granted. The
shares vest in equal annual installments over a period of two to three years,
subject to continued employment. The stock is not issued until the vesting
requirements are met, thus the stock does not carry any voting or dividend
rights.
Under the provisions of SFAS No. 123, "Accounting for Stock Based Compensation",
the Company has elected to account for its stock-based compensation under ABP
Opinion 25, "Accounting for Stock Issued to Employees." Under APB Opinion 25,
the accrual for the shares granted under the plan was recorded at fair market
value on the measurement date with a corresponding charge to shareholders'
equity representing the unearned portion of the grant. The unearned portion of
the grant is amortized as compensation expense on a straight-line basis over the
related vesting period. Compensation for the three and six month period ended
June 30, 2002 totaled $0.1 million.
12
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following is a discussion and analysis of the consolidated results of
operations and financial condition of Argonaut Group, Inc. and its subsidiaries
(collectively, "Argonaut Group" or the "Company") for the three and six months
ended June 30, 2002 and 2001. It should be read in conjunction with the
consolidated financial statements and other data presented herein as well as
with the Management's Discussion and Analysis of Results of Operation and
Financial Condition contained in the Company's 2001 Annual Report on Form 10-K.
Overview
As of June 30, 2002, the Company's operations include four continuing business
segments: excess and surplus lines, specialty commercial, specialty workers'
compensation and public entity. The results of operations for the three and six
months ended June 30, 2002 include the activities of Colony Insurance Group
("Colony"), included in the excess and surplus lines segment, and Rockwood
Casualty Insurance Group ("Rockwood"), included in the specialty commercial
segment, both acquired by the Company in the third quarter of 2001, as well as
business resulting from the renewal rights acquired from Fulcrum Insurance
Company ("Fulcrum") - see segment results.
Consolidated results of operations
The following table summarizes the results from operations for the three and six
month periods ended June 30, 2002 and 2001, respectively:
Three months ended Six months ended
June 30, June 30,
(Dollars in millions) 2002 2001 2002 2001
---------- ---------- ------------ ------------
Premiums earned $ 84.0 $ 37.9 $ 168.6 $ 67.5
Net investment income 13.8 12.8 27.1 26.5
Losses and loss adjustment expenses 61.6 34.4 124.2 60.8
Underwriting, acquisition and
insurance expenses 32.8 18.6 65.4 38.0
Operating income (loss), net of tax 2.3 (1.4) 4.5 (2.4)
---------- ---------- ------------ ------------
Net income $ 6.1 $ 1.9 $ 13.6 $ 2.2
========== ========== ============ ============
Premiums earned increased for the three and six month periods ended June 30,
2002 due to the addition of Colony and Rockwood. Premiums earned by Colony and
Rockwood totaled $47.9 million and $93.0 million for the three and six month
periods ended June 30, 2002, respectively.
Increases in net investment income was the result of higher invested balances
during the three and six months ended June 30, 2002 as compared to 2001, which
were partially offset by lower yields for these periods. As of June 30, 2002,
total investments were approximately $1.2 billion, compared to $1.0 billion as
of June 30, 2001.
13
For the quarter ended June 30, 2002, losses and loss adjustment expenses
aggregated $61.6 million versus $34.4 million for the same period of 2001. The
increase in losses and loss adjustment expenses was primarily attributable to
the acquisition of Colony and Rockwood. The Company's loss ratio improved to
73.3% in the current quarter compared to 90.8% for the same period in 2001. The
improvement in the loss ratio was attributable to Colony and Rockwood coupled
with rate increases and underwriting changes in the specialty commercial
business as written by Argonaut Great Central Insurance Company ("Argonaut Great
Central") - see segment discussion.
The Company's underwriting, acquisition and insurance expenses increased to
$32.8 million for the three months ended June 30, 2002 from $18.6 million for
the same quarter of 2001 due primarily to premium volume produced by Colony and
Rockwood. The expense ratio for the three months ended June 30, 2002 improved to
38.7% versus 49.1% in the comparable quarter of 2001. This was primarily due to
the addition of Colony and Rockwood in 2002, the effect of which was to lower
the weighted average Company expense ratio. The expense ratio for the six months
ended June 30, 2002 also improved to 38.8% from 56.3% in the six months ended
2001 for the same factors previously noted.
Operating income is defined as net income excluding after-tax realized
investment results. Since operating income excludes the effects of realized
gains and losses attributable to the Company's investment portfolio, management
believes it presents the underlying results of operations of the Company's
primary businesses. Operating income should not be viewed as a substitute for
net income determined in accordance with GAAP. Consolidated operating income for
the three months ended June 30, 2002 was $2.3 million compared to an operating
loss of $1.4 million for the comparable quarter in 2001. Operating income for
the six months ended June 30, 2002 was $4.5 million compared to an operating
loss of $2.4 million for the six months then ended in 2001. Improvement in
operating income was attributable primarily to the addition of Colony and
Rockwood, which reported operating income of $3.3 million and $6.3 million for
the three and six month period ended June 30, 2002, respectively.
Segment Results.
Excess and Surplus Lines. The following table summarizes the excess and surplus
lines results of operations for the three and six months ended June 30, 2002. On
May 6, 2002, the Company announced it had completed the acquisition for the
renewal rights and certain other assets of Fulcrum, a subsidiary of the SCOR
Group. Fulcrum is an excess and surplus lines underwriter concentrating in
specialized property and general liability. The Fulcrum business is included in
this segment for the three and six months ended June 30, 2002 from the date of
acquisition. Premiums earned from the date of acquisition through June 30, 2002
were approximately $0.3 million, losses and loss adjustment expenses totaled
$0.3 million and underwriting expenses aggregated $1.1 million. The Company did
not have a comparable segment for the same periods in 2001.
Three months ended Six months ended
June 30, June 30,
(Dollars in millions) 2002 2001 2002 2001
---------- ---------- ----------- -------------
Net written premiums $ 41.8 $ - $ 75.1 $ -
========== ========== ============ ============
Premiums earned 30.9 - 59.6 -
Losses and loss adjustment expenses 19.7 - 37.6 -
Underwriting expense 10.5 - 20.6 -
---------- ---------- ------------ ------------
Underwriting income $ 0.7 $ - $ 1.4 $ -
========== ========== ============ ============
14
For the three months ended June 30, 2002, the excess and surplus lines segment,
written through Colony, reported an underwriting profit of $0.7 million and a
combined ratio of 97.7%. For the six months ended June 30, 2002, the excess and
surplus lines reported an underwriting profit of $1.4 million and a combined
ratio of 97.6%.
Specialty Commercial. The following table summarizes the specialty
commercial results of operations for the three and six months ended June 30,
2002 and 2001.
Three months ended Six months ended
June 30, June 30,
(Dollars in millions) 2002 2001 2002 2001
---------- ---------- ------------ ------------
Net written premiums $ 26.3 $ 8.6 $ 52.7 $ 17.9
========== ========== ============ ============
Premiums earned 25.8 8.5 50.7 16.6
Losses and loss adjustment expenses 17.9 7.6 35.5 15.3
Underwriting expenses 7.8 2.9 15.7 6.1
---------- ---------- ------------ ------------
Underwriting income (loss) $ 0.1 $ (2.0) $ (0.5) $ (4.8)
========== ========== ============ ============
For the three months ended June 30, 2002, the specialty commercial segment,
written through Rockwood and Argonaut Great Central, reported underwriting
income of $0.1 million and a combined ratio of 99.8%, compared to an
underwriting loss of $2.0 million and a combined ratio of 123.5% for the same
period ended 2001. For the six months ended June 30, 2002, this segment reported
an underwriting loss of $0.5 million and a combined ratio of 101.0% compared to
an underwriting loss of $4.8 million and a combined ratio of 129.1% for the same
period ended 2001.
For the three and six month period ended June 30, 2002, Rockwood reported net
written premiums of $17.1 million and $34.6 million, respectively. For the three
and six month period ended June 30, 2002, Rockwood contributed net earned
premiums of $16.9 million and $33.3 million, respectively. Rockwood has realized
rate increases in excess of 10%, while maintaining a retention rate of 87%.
Rockwood's new business was primarily in its commercial workers' compensation
line. Argonaut Great Central's written and earned premiums were comparable to
the same period for the prior year.
15
The specialty commercial segment's loss ratio for the three months ended June
30, 2002 was 69.4% compared to 88.6% in the comparable period of 2001. Losses
and loss adjustment expenses increased $10.3 million in the second quarter of
2002 compared to 2001 primarily due to $12.0 million attributable to Rockwood.
Rockwood's loss ratio for the three months ended June 30, 2002 was 70.5%. The
implementation of more stringent underwriting standards at Argonaut Great
Central, combined with pricing actions and lower catastrophe losses, resulted in
an improved loss ratio of 67.3% for the three months ended June 30, 2002, as
compared to 88.6% for the same period in 2001. For the six months ended June 30,
2002, Rockwood incurred losses and loss adjustment expenses of $23.6 million,
resulting in a loss ratio of 70.9%. Argonaut Great Central's loss ratio improved
to 68.7% for the six months ended June 30, 2002 from 92.0% for the same period
of 2001 due to the factors noted above.
The expense ratio for the specialty commercial segment decreased to 30.4% in the
second quarter of 2002 versus 34.4% in the second quarter of 2001. Underwriting
expenses for the three months ended June 30, 2002 included $4.8 million
attributable to Rockwood. Rockwood's expense ratio was 28.3% for the three
months ended June 30, 2002. Argonaut Great Central's expense ratio of 34.9% for
the three months ended June 30, 2002 was comparable to its expense ratio of
34.4% for the same period of 2001. For the six months ended June 30, 2002,
underwriting expenses for the specialty commercial segment included $9.6 million
attributable to Rockwood. Rockwood incurred an expense ratio of 28.8% for the
same six month period. Argonaut Great Central's expense ratio improved to 35.2%
for the six months ended June 30, 2002, compared to an expense ratio of 37.1%
for the same period of 2001.
Specialty Workers' Compensation. The following table summarizes the specialty
workers' compensation results of operations for the three and six months ended
June 30, 2002 and 2001.
Three months ended Six months ended
June 30, June 30,
(Dollars in millions) 2002 2001 2002 2001
---------- ---------- ------------ ------------
Net written premiums $ 36.3 $ 30.5 $ 70.1 $ 59.5
========== ========== ============ ============
Premiums earned 25.4 28.5 54.6 49.6
Losses and loss adjustment expenses 22.7 26.2 48.4 44.5
Underwriting expense 11.7 14.6 24.9 29.9
---------- ---------- ------------ ------------
Underwriting loss $ (9.0) $ (12.3) $ (18.7) $ (24.8)
========== ========== ============ ============
For the quarter ended June 30, 2002 the specialty workers' compensation segment,
written through Argonaut Insurance Company, reported an underwriting loss of
$9.0 million and a combined ratio of 135.6%, compared to an underwriting loss of
$12.3 million and a combined ratio of 143.5% for the same period ended 2001. For
the six months ended June 30, 2002, the specialty workers' compensation segment
reported a net underwriting loss of $18.7 million and a combined ratio of
134.7%, compared to a net underwriting loss of $24.8 million and a combined
ratio of 150.1% for the six months ended June 30, 2001.
Increases in net written premiums for the three and six months ended June 30,
2002 as compared to the same periods ended 2001 were due to rate increases and
new business. Higher ceded premium rates held down the level of net written
premium increases for both the quarter and year to date. Second quarter new
business included net written premiums of $9.2 million for business acquired
through a renewal rights purchase. The workers' compensation line of business is
characterized by written premiums which are based on estimates of insureds
payrolls until policy expiration. Subsequent to policy expiration, final policy
billing adjustments are made to reflect actual payrolls. Final policy billings
in the second quarter of 2002 were lower than the second quarter of 2001, and
this partially offset the increase described above.
16
The lower final policy billings for the three months ended June 30, 2002 along
with increased ceded premiums were the primary cause for lower net earned
premiums as compared to the same period ended 2001. Year to date net earned
premiums were higher than the same period ended 2001 due to higher premium
writings and higher final policy billings in the first quarter of 2002, although
partially offset by higher ceded premiums.
Losses and loss adjustment expenses for the three and six month periods ended
June 30, 2002 resulted in loss ratios of 89.8% and 88.9%, respectively, compared
to 92.1% and 89.8% for the three and six month periods ended June 30, 2001.
Although this segment implemented rate increases in 2001 and 2002 and has not
experienced adverse loss development on policies written in prior years, losses
and loss adjustment expenses for 2002 were accrued at levels consistent with
2001 due to historical workers' compensation underwriting results, particularly
in California.
The expense ratio for the three and six months ended June 30, 2002 improved to
45.8% and 45.8%, respectively, from 51.4% and 60.3% for the like periods in the
prior year. Deferred acquisition costs of $4.4 million were recorded in the
quarter. Of this, $2.2 million was related to acquisition costs incurred for the
renewal rights business discussed above, and the remaining $2.2 million relates
to business written in 2002. For the six months ended June 30, 2002, acquisition
costs of $5.7 million have been deferred.
Public Entity. The following table summarizes the results of operations for the
public entity segment for the three and six months ended June 30, 2002 and 2001.
Three months ended Six months ended
June 30, June 30,
(Dollars in millions) 2002 2001 2002 2001
---------- ---------- ------------ ------------
Net written premiums $ 1.9 $ 1.8 $ 4.4 $ 2.6
========== ========== ============ ============
Premiums earned 1.9 0.9 3.7 1.3
Losses and loss adjustment expenses 1.3 0.6 2.6 0.9
Underwriting expense 0.8 0.5 1.5 0.9
---------- ---------- ------------ ------------
Underwriting loss $ (0.2) $ (0.2) $ (0.4) $ (0.5)
========== ========== ============ ============
For the three months ended June 30, 2002 the public entity segment, written
through Trident Insurance Services, Inc., reported a net underwriting loss of
$0.2 million and a combined ratio of 109.4%, compared to an underwriting loss of
$0.2 million and a combined ratio of 127.5% for the same period ended 2001. For
the six months ended June 30, 2002, the public entity segment reported a net
underwriting loss of $0.4 million and a combined ratio of 111.0%, compared to a
net underwriting loss of $0.5 million and a combined ratio of 139.5% for the
same period ended 2001. This segment began writing business in the fourth
quarter of 2000, and continues to experience growth as it penetrates its target
market.
17
Liquidity
The Company's principal operating cash flow sources are premiums and investment
income. The primary operating cash outflows are for claim payments and operating
expenses.
For the six months ended June 30, 2002, net cash provided by operating
activities was $11.6 million, compared to net cash used for operating activities
of $29.9 million for the same period ended 2001. The increase in cash inflow was
primarily attributable to improved underwriting results from rate increases
implemented in 2001 and 2002 coupled with cost savings initiatives.
As of June 30, 2002, the Company has repurchased approximately 7.9 million
shares of common stock out of a total 10 million shares authorized for
repurchase. During the three and six months ended June 30, 2002, the Company did
not repurchase additional shares of its common stock.
For the three and six months ended June 30, 2002, Argonaut Insurance Company
paid dividends of $6.5 million and $11.5 million, respectively, to its parent,
Argonaut Group, Inc. Dividends from subsidiaries are the primary source of funds
for liquidity, shareholder dividends and stock repurchases.
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. Management believes that current reinsurance
levels are sufficient to safeguard the Company from these risks.
The Company has exposures related to asbestos and environmental liability claims
arising out of general liability coverage primarily written in the 1970's and to
a lesser extent the mid 1980's. In addition to the general uncertainties
encountered in estimating reserves, there are significant additional
uncertainties in estimating the amount of the Company's potential losses from
asbestos and environmental claims. Compounding these uncertainties are recent
inconsistent judicial interpretation of applicable laws that may lead to the
expansion of the scope of policy coverage. The Company establishes reserves to
the extent that, in the judgment of management, the facts and prevailing law
reflect an exposure for the Company or its reinsurers. Due to these
uncertainties and the ever-changing legal environment regarding these claims,
the ultimate losses may vary materially from current loss reserves and could
have a material adverse effect on the Company's future financial condition,
results of operations and cash flows.
The recent accident involving nine miners trapped in the Quecreek Mine near
Somerset, Pennsylvania, has resulted in loss exposure to Rockwood. Though actual
losses have not been determined, management believes any loss will not be
significant to the financial statements of the Company taken as a whole.
Refer to "Management's Discussion and Analysis on Operating Results and
Financial Condition - Liquidity" in the Company's 2001 Annual Report on Form
10-K for further discussion on the Company's liquidity.
Significant Accounting Policies
Refer to "Critical Accounting Policies" in the Company's 2001 Annual Report on
Form 10-K for information on accounting policies that the Company considers
critical in preparing its Consolidated Financial Statements. These policies
include significant estimates made by management using information available at
the time the estimates were made. However, these estimates could change
materially if different information or assumptions were used.
18
Forward Looking Statements
Management's Discussion and Analysis of Results of Operations and Financial
Conditions, Quantitative and Qualitative information about Market Risk and the
accompanying Condensed Consolidated Financial Statements (including the notes
thereto) contains "forward looking statements" which are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements are based on the Company's current expectations
and beliefs concerning future developments and their potential effects on the
Company. There can be no assurance that actual developments will be those
anticipated by the Company. Actual results may differ materially from those
projected as a result of significant risks and uncertainties, including
non-receipt of the expected payments, changes in interest rates, effect of the
performance of financial markets on investment income and fair values of
investments, development of claims and the effect on loss reserves, accuracy in
projecting loss reserves, the impact of competition and pricing environments,
changes in the demand for the Company's products, the effect of general economic
conditions, adverse state and federal legislation and regulations, developments
relating to existing agreements, heightened competition, changes in pricing
environments, and changes in asset valuations. The Company undertakes no
obligation to publicly update any forward-looking statements as a result of
events or developments subsequent to the date of this Quarterly Report.
Item 3. Market Risks
The Company's assets include financial instruments subject to the risk of
potential losses from adverse changes in market rates and prices. The primary
market risk exposures are interest-rate risk and equity price risk. The Company
does not hold any foreign currency risk or derivative instruments. Subsequent to
June 30, 2002, the downturn in the equity markets has reduced the Company's net
unrealized gains as it relates to equity securities.
The Company holds a well-diversified portfolio of investments in common stocks
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 of securities owned and by limiting the exposure in any one
investment or type of investment. At June 30, 2002, investments in equity
securities include an investment in the common stock of Curtiss-Wright
Corporation which represents approximately 13% (pre-tax) of the total
shareholders' equity.
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 redeemable preferred stocks. Some fixed income securities have call or
prepayment options. This subjects the Company to reinvestment risk as issuers
may call their securities, causing the Company to reinvest the proceeds at lower
interest rates.
Exposure to interest rate risks is managed by adhering to specific guidelines in
connection with the investment portfolio. The Company primarily invests 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.)
Less than 1.0% of the fixed income portfolio is invested in bonds rated lower
than "BAA". During the six months ended June 30, 2002, Rockwood wrote down an
investment in WorldCom, Inc. in the amount of $0.5 million.
19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Superior Construction, Inc. v. Argonaut Insurance Company A putative class
action has been filed in Los Angeles Superior Court alleging that Argonaut
Insurance Company in isolated instances inadvertently miscoded loss data
regarding workers' compensation claims reported to the California Workers'
Compensation Insurance Rating Bureau from 1989 through 1993. Superior's
complaint seeks monetary damages, including punitive damages and costs, as well
as injunctive relief.
Following mediation, Argonaut Insurance Company has tentatively agreed, without
admitting liability or any wrongdoing and subject to court approval, to enter
into a class action settlement resolving all claims. Although management is
unable to reasonably estimate at this time the actual amounts which may be paid
to class members under the tentative settlement, the maximum liability pending
court approval now consists of a) $1.0 million in attorney's fees payable to the
plaintiff's attorneys, b) cash payments to qualifying applicants from a $1.0
million fund established for this purpose, and c) up to $1.0 million in vouchers
for discounts on future premiums distributed to qualifying applicants. As of
June 30, 2002 the Company has accrued its best estimate of the losses associated
with this case.
Argonaut Insurance Company v. Los Angeles Metropolitan Transit Authority. On
August 30, 1996, the Los Angeles County Metropolitan Transportation Authority
("MTA") filed a civil action against Argonaut Insurance 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.
Argonaut Insurance Company has responded to the complaint, and brought certain
counterclaims against the MTA in connection with the facts underlying the
lawsuit. The Company believes it has meritorious defenses, and intends to
vigorously contest these claims. The trial judge for the MTA litigation has
ordered that the first stage of this case to be tried before a three-judge panel
instead of jury by agreement of the parties, although no trial date has been
set. That trial will primarily consider a portion of Argonaut Insurance
Company's counterclaim for sums it contends are due to it from the MTA. To date
the Court has ruled on three motions for summary adjudication relating to the
recoverability of the receivable, one filed by Argonaut and two by the MTA. In
each instance the Court has adopted the position asserted by Argonaut Insurance
Company. The Company is unable to comment upon the range of any potential loss
or recovery, 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.
Voluntary Market Premium Litigation. Argonaut Insurance Company was 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
Argonaut Insurance Company in several other states, but to date have not. Of the
original sixteen suits filed, all but four have either been dismissed or
judgment entered for defendant at the trial court level, although some rulings
are subject to appeal or further review. Two of the remaining five have been
determined no longer material, with all but one count having been dismissed and
class certification denied, and one case has been dormant for over two years.
The remaining case has been stayed by the Federal Fifth Circuit Court pending
interlocutory appeal from a ruling by the trial court in Texas approving class
certification. Argonaut Insurance Company intends to vigorously defend these
lawsuits and has been successful in having a number of them dismissed or stayed.
Management is unable to determine the potential financial impact of lawsuits
which remain active at this time.
20
Diamond Woodworks vs. Argonaut Insurance Company. Filed in the Superior Court of
Orange County, California, this case arose out of Argonaut Insurance Company'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 $14.0 million in punitive damages against the
Argonaut Insurance Company, which verdict was subsequently confirmed by the
Court. Argonaut Insurance Company filed post judgment motions and the judgment
for punitive damages was reduced to $5.5 million. Argonaut Insurance Company is
pursuing an appeal of the adverse final judgment, and has posted a surety bond
for the judgment pending appeal. The Company has recorded the $700,000 judgment
for compensatory damages but has not recorded the $5.5 million judgment for
punitive damages. Management is currently unable to estimate the amount (if any)
of punitive damages that will be paid.
Princeville Hotel v. Argonaut Insurance Company The underlying case alleges
wrongful denial of a property damage claim originally made in 1991 by the
Princeville Hotel in Hawaii regarding installation of a new roof for that
facility. Additional claims have also been brought for failure to provide a
defense to two contractors listed as additional insureds on the policy. Although
all indemnity and defense obligations arising under the policy in connection
with the underlying claim have been resolved and accrued for by the Company in
prior periods, claims for extra-contractual damages, including punitive damages,
have been brought by the additional insureds or their assigns and are still
pending. 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 ongoing discovery conducted in the case its investigation of
the matter conducted thus far, but notes that punitive damages in a case of this
nature could be material to the results of the Company, if awarded by a jury.
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.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None.
21
Item 5. Other Information
In connection with the filing of this Form 10-Q, management has reviewed the
effectiveness of the Company's internal controls designed to ensure that
material information relating to the Company and its consolidated subsidiaries
is made known to management by others within such consolidated subsidiaries.
During the three month period ended June 30, 2002 and through the date of
filing, there were, a) no significant changes in the Company's internal controls
designed to ensure that material information relating to the Company and its
consolidated subsidiaries is made known to management by others within such
consolidated subsidiaries, b) no significant changes in other factors that could
significantly affect internal controls, and c) no corrective action required or
taken with regard to significant deficiencies and material weaknesses in such
internal controls.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Item 99.1 Certification of Compliance with Section 906 Sarbanes-Oxley
Act of 2002
Item 99. 2 Certification of Voluntary Compliance Relating to
Section 302 of the Sarbanes-Oxley Act of 2002 and S.E.C.
Release No. 34-46079, Proposed Rule on Certification of
Disclosure in Companies' Quarterly and Annual Reports
(b) Reports on Form 8K
None
22
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
Chief Executive Officer and President
(principal executive officer)
/s/ Mark W. Haushill
- ---------------------------------------
Mark W. Haushill
Chief Financial Officer, Vice President and Treasurer
(principal financial and accounting officer)
/s/ Byron L. LeFlore, Jr.
- ---------------------------------------
Byron L. LeFlore, Jr.
General Counsel, Vice President and Secretary
August 14, 2002
23
EXHIBIT 99.1
CERTIFICATION OF COMPLIANCE WITH SECTION 906
SARBANES-OXLEY ACT OF 2002
The undersigned officers of Argonaut Group, Inc. (the "Company") hereby certify
in connection with the Form 10-Q covering the period April 1, 2002 through June
30, 2002 (the "Report") that:
1. The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
2. The information in the Report fairly presents, in all material
respects, the financial condition and results of operations of
the Company.
CERTIFIED this 14th day of August, 2002.
/s/ Mark E. Watson III
--------------------------------------------
Mark E. Watson III
President and Chief Executive Officer
/s/ Mark W. Haushill
--------------------------------------------
Mark W. Haushill
Vice President, Chief Financial Officer and Treasurer
24
EXHIBIT 99.2
CERTIFICATE OF VOLUNTARY COMPLIANCE
Relating to
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
And
S.E.C. RELEASE NO. 34-46079
PROPOSED RULE ON CERTIFICATION OF DISCLOSURE
IN COMPANIES' QUARTERLY AND ANNUAL REPORTS
The undersigned officers of Argonaut Group, Inc. (the "Company") hereby certify
in connection with the Form 10-Q periodic report covering the period April 1,
2002 through June 30, 2002 (the "Report") that:
1. he has read and reviewed the Report;
2. based on the officer's knowledge, the Report does not contain any
untrue statement of material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which the statements were made, not misleading;
3. based on his knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material
respects the financial condition and results of operations of the
Company as of, and for, the period presented in the Report;
4. he has during the Period covered by the Report:
a. been responsible for establishing and maintaining internal
controls for the Company;
b. designed such internal controls to ensure that material information
relating to the Company and its consolidated subsidiaries is made
known to such officer by others within those entities;
c. evaluated the effectiveness of the Company's internal controls as
the last date covered by the Report; and
d. presented in the Report his conclusions about the effectiveness of
the Company's internal controls based on his evaluation;
5. he has disclosed to the Company's auditors and audit committee of the
board of directors
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to
record, process, summarize, and report financial data and have
identified for the Company's auditors any material weakness in such
controls; and
b. any fraud, whether or not material, that involves the management or
other employees who have a significant role in the Company's internal
controls; and
6. he has indicated in the Report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of his
evaluation referenced in item 4(c) above, including any corrective
actions with regard to significant deficiencies and material weaknesses
in such internal controls.
25
This certification is made in a good faith effort to comply with the spirit of
and intent of the provisions of a) Section 302 of the Sarbanes-Oxley Act of 2002
prior to the adoption of by the United States Securities and Exchange Commission
of rules or regulations pursuant to such section, and b) S.E.C. Release No.
34-46079 Proposed Rule on Certification of Disclosure in Companies' Quarterly
and Annual Reports prior to the date such proposed rule would require any such
certification. It is not intended and shall not be construed to be a
representation or certification under any other existing or future law, rule or
regulation, (including any rule or regulation promulgated by the United States
Securities and Exchange Commission pursuant to the Act itself at a later date),
nor shall the factual statements made herein be applicable to any other period
than that covered by the Report.
CERTIFIED this 14th day of August, 2002.
/s/ Mark E. Watson III
--------------------------------------------
Mark E. Watson III
President and Chief Executive Officer
/s/ Mark W. Haushill
--------------------------------------------
Mark W. Haushill
Vice President, Chief Financial Officer and Treasurer
/s/ Byron L. LeFlore, Jr.
--------------------------------------------
Byron L. LeFlore, Jr.
Vice President, General Counsel and Secretary
Attest:
/s/ Mark T. Torok
------------------------------
Mark T. Torok
Assistant Secretary