Argonaut Group, Inc. Announces 2005 Third Quarter Results; Company Produces Profitable Results Despite Hurricanes and Resolution of Certain Legacy Issues.SAN ANTONIO San Antonio (săn ăntō`nēō, əntōn`), city (1990 pop. 935,933), seat of Bexar co., S central Tex., at the source of the San Antonio River; inc. 1837. -- Argonaut Group, Inc. (NASDAQ NASDAQ in full National Association of Securities Dealers Automated Quotations U.S. market for over-the-counter securities. Established in 1971 by the National Association of Securities Dealers (NASD), NASDAQ is an automated quotation system that reports on :AGII) today announced financial results for the three and nine months ended Sept. 30, 2005. Performance highlights for the 2005 third quarter include the following: --Gross written premiums set a new record, exceeding $300 million, up 16.2 percent over the same three months in 2004; --Earned premiums and investment income reached new quarterly highs, up 14.4 percent and 32.1 percent over the third quarter of 2004, respectively; --Book value at the close of the third quarter was $653.9 million, up 8.4 percent versus $603.4 million at Dec. 31, 2004; --Pre-tax hurricane hurricane, tropical cyclone in which winds attain speeds greater than 74 mi (119 km) per hr. Wind speeds reach over 190 mi (289 km) per hr in some hurricanes. losses for the quarter were approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $14.7 million, net of reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. , or $0.47 per share on a fully diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. basis versus $20.0 million, or $0.65 per share in the same quarter of 2004; --Net income was $5.4 million or $0.17 per share on a fully diluted basis; --Cash flow from operations was approximately $154.0 million. Argonaut Group President and CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. Mark E. Watson III said, "The third quarter was significant for Argonaut Group. We took important steps to resolve certain legacy issues that have been of concern to our shareholders for quite some time. We also weathered one of the most devastating dev·as·tate tr.v. dev·as·tat·ed, dev·as·tat·ing, dev·as·tates 1. To lay waste; destroy. 2. To overwhelm; confound; stun: was devastated by the rude remark. natural disasters in our nation's history during the quarter, responding to the needs of hundreds of our insureds affected by Katrina KATRINA Keeping All the Resources in New Orleans Alive KATRINA Krewe Aiding Trash Removal In the New Orleans Area and one other major hurricane event. At the same time, Argonaut Group managed to maintain top-line momentum and report positive earnings results. With a growing, profitable business platform and balance sheet strength, we are well positioned to finish this year on a positive note and approach 2006 with optimism Optimism See also Hope. Bontemps, Roger personification of cheery contentment. [Fr. Lit.: “Roger Bontemps” in Walsh Modern, 66] Candide beset by inconceivable misfortunes, hero indifferently shrugs them off. [Fr. ." LEGACY ISSUES RESOLVED DURING QUARTER In September September: see month. 2005, Argonaut Group announced the impact that certain legacy issues would have on 2005 third quarter financial results. Included were:
1. Commutation of Adverse Development Cover - $7.0 million in pre-tax
income resulting from the commutation of its adverse development
cover with Inter-Ocean N.A. Reinsurance Company, Ltd.;
2. Reinsurance Balances Recoverable - $10.0 million charge associated
with an increase in the allowance for doubtful accounts related to
the anticipated commutation of certain reinsurance treaties,
including treaties with subsidiaries of Trenwick Group, Ltd.;
3. Asbestos and Environmental Reserves - an approximate $4.0 million
charge related to an increase in the unallocated loss adjustment
expense reserve for the estimated expense of the Company's claims
unit that will settle future A&E claims;
4. Risk Management - a restructuring charge of less than $1.0 million
associated with the sale of renewal rights to a substantial
portion of its Risk Management segment;
5. MTA Receivable - receipt of $45 million cash payment from the MTA
on Sept. 15, 2005 that converted a receivable into
interest-bearing assets.
The aggregation of the legacy issues noted above reduced pre-tax pre-tax adj → anterior al impuesto pre-tax adj → avant impôt(s) pre-tax adj → al lordo d'imposta fully diluted earnings per share diluted earnings per share An earnings measure calculated by dividing net income less preferred stock dividends for a period by the average number of shares of common stock that would be outstanding if all convertible securities were converted into shares of by approximately $0.24 per share. FINANCIAL RESULTS For the third quarter of 2005, Argonaut Group reported net income of $5.4 million or $0.17 per diluted common share on 31.4 million shares, which includes pre-tax operating income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. of $4.8 million, a pre-tax realized gain Realized Gain A gain resulting from selling an asset at a price higher than the original purchase price. Notes: There may be tax consequences for a realized profit. on sales of investments of $0.4 million and an income tax benefit of $0.2 million. This compares to 2004 third quarter net income of $9.4 million or $0.31 per diluted common share on 30.8 million shares, which included a pre-tax operating loss operating loss The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit. Compare operating income. of $2.5 million, a realized gain on sales of investments of $0.8 million and an income tax benefit of $11.1 million. The Company believes operating income is another meaningful measure of Argonaut Group's performance, yet differs from net income under accounting principles generally accepted in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. (GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). ) in that operating income excludes income tax benefit or expense and net realized investment gains and losses. For a reconciliation of operating income to GAAP net income for the three and nine months ended Sept. 30, 2005 and 2004, respectively, please refer to the reconciliation table attached to this news release. Total revenue was $202.0 million during the third quarter of 2005, compared to $174.5 million for the same period in 2004, or a 15.8 percent increase. Total revenue includes realized gains on the sales of investments, which were $0.4 million and $0.8 million for the third quarters of 2005 and 2004, respectively. Earned premiums Earned premium is the portion of an insurance written premium which is considered "earned" by the insurer, based on the part of the policy period that the insurance has been in effect, and during which the insurer has been exposed to loss. for the three months ended Sept. 30, 2005 were $180.2 million compared to $157.5 million for the comparable quarter in 2004, or a 14.4 percent increase. The Group combined ratio for the third quarter of 2005 was 107.0 percent, versus 110.0 percent for the same three-month period in 2004. The Group combined ratio for the third quarter included approximately 8.2 percentage points relative to hurricane activity and approximately 4.1 percentage points associated with the resolution of certain legacy issues. In the third quarter of 2004, the Group combined ratio included approximately 12.4 percentage points associated with hurricane activity. For the nine months ended Sept. 30, 2005, Argonaut Group reported net income of $55.1 million or $1.76 per diluted common share, versus $45.6 million or $1.48 per diluted common share for the first three quarters of 2004. Total revenue during the first nine months of 2005 was $573.8 million versus $517.7 million during the first three quarters of 2004. Total revenue includes realized gains on sales of investments of $1.7 million and $2.8 million for the nine months ended Sept. 30, 2005 and Sept. 30, 2004, respectively. Earned premiums for the first nine months of 2005 were $511.2 million compared to $468.3 million during the first nine months of 2004. SEGMENT RESULTS Excess & Surplus Lines (E&S) - For the third quarter of 2005, gross written premiums for E&S totaled $184.0 million, resulting in pre-tax operating income of $6.3 million. This compares to gross written premiums of $105.5 million and an operating loss of $3.7 million in the third quarter of 2004. The combined ratio for the 2005 third quarter of 101.6 percent, versus 112.5 percent a year earlier, was negatively impacted by approximately $11.7 million in catastrophic losses and other associated expenses resulting from Hurricanes Katrina and Rita during the third quarter. The E&S segment's combined ratio exclusive of third quarter catastrophic losses was 90.0 percent. For the nine months ended Sept. 30, 2005, gross written premiums for E&S Lines were $441.8 million, generating operating income of $36.1 million and a combined ratio of 94.3 percent. This compares to gross written premiums of $315.6 million, operating income of $21.5 million and a combined ratio of 97.3 percent for the first nine months of 2004. Select Markets - During the third quarter, gross written premiums were $60.1 million and operating income totaled $6.2 million, compared to gross written premiums of $60.7 million and operating income of $4.6 million during the same period in 2004. The combined ratio for the 2005 third quarter of 94.4 percent versus 95.1 percent in the prior year, was impacted by approximately $2.2 million in catastrophic losses and other associated expenses resulting from Hurricanes Katrina and Rita during the third quarter. Select Markets' combined ratio exclusive of third quarter 2005 catastrophic losses was 88.9 percent. For the nine months ended Sept. 30, 2005, gross written premiums for Select Markets were $171.1 million, generating operating income of $17.2 million and a combined ratio of 95.1 percent. This compares to gross written premiums of $156.0 million, operating income of $10.9 million and a combined ratio of 97.0 percent during the first nine months of 2004. Risk Management - Gross written premiums were $32.9 million for the three months ended Sept. 30, 2005, resulting in an operating loss of $0.5 million, compared to gross written premiums of $52.3 million and operating income of $4.8 million for the same period in 2004. For the third quarter, the combined ratio in this segment was 136.7 percent versus 109.5 percent a year earlier. For the nine months ended Sept. 30, 2005, gross written premiums for Risk Management were $107.6 million, generating operating income of $14.8 million and a combined ratio of 114.0 percent. For the nine months ended Sept. 30, 2004, gross written premiums were $136.9 million, generating operating income of $13.7 million and a combined ratio of 108.9 percent. Public Entity - Gross written premiums for the 2005 third quarter were $26.8 million and operating income totaled $1.5 million, versus gross written premiums of $43.0 million and an operating loss of $0.2 million for the quarter ended Sept. 30, 2004. The combined ratio for the 2005 third quarter of 97.2 percent, versus 104.5 percent a year earlier, was impacted by approximately $0.8 million in catastrophic losses and other associated expense resulting from Hurricanes Katrina and Rita during the third quarter. Public Entity's combined ratio exclusive of third quarter catastrophic losses was 91.4 percent. For the nine months ended Sept. 30, 2005, gross written premiums for Public Entity were $55.0 million, generating operating income of $5.5 million and a combined ratio of 95.6 percent. This compares to gross written premiums of $74.7 million, operating income of $1.6 million and a combined ratio of 99.3 percent for the nine-month period ended Sept. 30, 2004. CONFERENCE CALL Argonaut Group will webcast an investor conference call at 11:00 a.m. Eastern (10:00 a.m. Central) on Thursday Thursday: see week. , Nov. 3, 2005. The conference call can be accessed by visiting Argonaut Group's investor relations Investor relations The process by which the corporation communicates with its investors. Web page at www.argonautgroup.com and clicking on "investor relations," or by telephone toll free at 888-396-2386 (pass code: 38427370). The international dial-in number for the conference call is 617-847-8712. A replay of the conference call will be available approximately one hour after the call's completion on Argonaut Group's investor relations Web page, or by telephone toll free at 888-286-8010 (pass code: 46846758). If calling from abroad, please access the conference call replay by dialing 617-801-6888. ABOUT ARGONAUT GROUP, INC. Headquartered in San Antonio, Argonaut Group, Inc. (NASDAQ:AGII) is a national underwriter underwriter n. a company or person which/who underwrites an insurance policy, issue of corporate securities, business, or project. (See: underwrite) UNDERWRITER, insurances. One who signs a policy of insurance, by which he becomes an insurer. of specialty A contract under seal. A specialty is a written document that has been sealed and delivered and is given as security for the payment of a specifically indicated debt. insurance products in niche niche: see ecology. niche Smallest unit of a habitat that is occupied by an organism. A habitat niche is the physical space occupied by the organism; an ecological niche is the role the organism plays in the community of organisms found in the areas of the property and casualty market with assets of approximately $3.3 billion at Sept. 30, 2005. Through its operating subsidiaries An operating subsidiary is a business term frequently used within the United States railroad industry. In the case of a railroad, it refers to a company that is a subsidiary but operates with its own identity and rolling stock. , Argonaut Group offers high quality customer service in programs tailored to the needs of its customers' business and risk management strategies. Collectively, Colony colony, any nonself-governing territory subject to the jurisdiction of a usually distant country. The term is also applied to a group of nationals who settle in a foreign country or territory but retain political or cultural connections with their parent state. Group, Argonaut Specialty, Rockwood Rock´wood` n. 1. (Min.) Ligniform asbestus; also, fossil wood. Casualty Group, Argonaut Insurance Company, Great Central Insurance, Grocers Insurance, and Trident Insurance Services underwrite To insure; to sell an issue of stocks and bonds or to guarantee the purchase of unsold stocks and bonds after a public issue. The word underwrite has two meanings. a full line of products in four primary areas: Excess and Surplus, Select Markets, Risk Management, and Public Entity. Information on Argonaut Group and its subsidiaries is available at www.argonautgroup.com. FORWARD-LOOKING STATEMENTS forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. DISCLOSURE This news release may contain "forward-looking statements" which are made pursuant to the safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. provisions of the Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and 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, regulations and regulatory reg·u·late tr.v. reg·u·lat·ed, reg·u·lat·ing, reg·u·lates 1. To control or direct according to rule, principle, or law. 2. investigations into industry practices, developments relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc existing agreements, heightened competition, changes in pricing environments, and changes in asset valuations. For a more detailed discussion of risks and uncertainties, see the Company's public filings made with the Securities and Exchange Commission. The Company undertakes no obligation to update any forward-looking statements.
ARGONAUT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
September 30, December 31,
2005 2004
------------ -----------
(unaudited)
Assets
Total investments $ 2,053.7 $ 1,783.9
Cash and cash equivalents 37.1 31.7
Accrued investment income 16.6 16.9
Receivables 727.2 847.3
Goodwill 106.3 106.3
Other assets 328.8 287.1
------------ -----------
Total assets $ 3,269.7 $ 3,073.2
============ ===========
Liabilities and Shareholders' Equity
Reserves for losses and loss adjustment
expenses $ 1,814.8 $ 1,607.5
Unearned premiums 460.9 390.8
Other liabilities 340.1 471.5
------------ -----------
Total liabilities 2,615.8 2,469.8
Total shareholders' equity 653.9 603.4
------------ -----------
Total liabilities and
shareholders' equity $ 3,269.7 $ 3,073.2
============ ===========
Book value per common share -
basic $ 22.79 $ 21.78
============ ===========
Book value per common share -
diluted (a) $ 20.99 $ 19.68
============ ===========
(a) Book value per common share - diluted, includes the impact of the
Series A Mandatory Convertible Preferred Stock on an as if
converted basis.
ARGONAUT GROUP, INC.
FINANCIAL HIGHLIGHTS
ALL SEGMENTS
(in millions, except share and per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2005 2004 2005 2004
(unaudited) (unaudited)
Gross Written Premiums $ 303.8 $ 261.5 $ 775.5 $ 683.2
Net Written Premiums 217.7 197.5 567.2 506.6
Earned Premiums 180.2 157.5 511.2 468.3
Net Investment Income 21.4 16.2 60.9 46.6
Gains on Sales of
Investments 0.4 0.8 1.7 2.8
--------- --------- --------- ---------
Total Revenue 202.0 174.5 573.8 517.7
Losses and Loss Adjustment
Expenses 127.1 117.7 322.8 310.0
Underwriting, Acquisition
and Insurance Expense 65.7 55.5 185.2 165.7
Interest Expense 4.0 3.0 12.0 7.5
--------- --------- --------- ---------
Total Expenses 196.8 176.2 520.0 483.2
Income Before Tax 5.2 (1.7) 53.8 34.5
Income Tax Provision
(Benefit) 0.8 (8.5) 16.7 3.9
Change in Deferred Tax
Valuation Allowance (1.0) (2.6) (18.0) (15.0)
--------- --------- --------- ---------
Net Income $ 5.4 $ 9.4 $ 55.1 $ 45.6
========= ========= ========= =========
Net Income (Loss):
From Operations $ 4.8 $ (2.5) $ 52.1 $ 31.7
From Sale of Investments 0.4 0.8 1.7 2.8
--------- --------- --------- ---------
Income (Loss) Before Taxes 5.2 (1.7) 53.8 34.5
Income Tax Provision
(Benefit) (0.2) (11.1) (1.3) (11.1)
--------- --------- --------- ---------
Total Net Income: $ 5.4 $ 9.4 $ 55.1 $ 45.6
========= ========= ========= =========
Net Income per Common
Share (Basic): $ 0.17 $ 0.32 $ 1.90 $ 1.59
========= ========= ========= =========
Net Income per Common
Share (Diluted): $ 0.17 $ 0.31 $ 1.76 $ 1.48
========= ========= ========= =========
Weighted Average Common
Shares (000's):
Basic 28,511.4 27,656.5 28,092.5 27,624.2
========= ========= ========= =========
Diluted 31,449.7 30,812.4 31,250.0 30,756.3
========= ========= ========= =========
ARGONAUT GROUP, INC.
SEGMENT DATA
(in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
(unaudited) (unaudited)
Excess & Surplus Lines
----------------------------
Gross Written Premiums $ 184.0 $ 105.5 $ 441.8 $ 315.6
Net Written Premiums 129.5 77.3 324.2 230.6
Earned Premiums 98.5 76.6 262.4 226.0
Underwriting Income (Loss) $ (1.5) $ (9.5) $ 14.9 $ 6.1
Net Investment Income 7.8 5.8 21.2 15.4
-------- -------- -------- --------
Operating Income (Loss)
Before Taxes $ 6.3 $ (3.7) $ 36.1 $ 21.5
======== ======== ======== ========
Loss Ratio 70.3 % 82.5 % 63.3 % 67.3 %
Expense Ratio 31.3 % 30.0 % 31.0 % 30.0 %
--------- -------- --------- --------
GAAP Combined Ratio 101.6 % 112.5 % 94.3 % 97.3 %
======== ======== ======== ========
GAAP Combined Ratio
excluding Cat Losses 90.0 % 90.2 % 90.0 % 89.8 %
======== ======== ======== ========
Select Markets
----------------------------
Gross Written Premiums $ 60.1 $ 60.7 $ 171.1 $ 156.0
Net Written Premiums 48.9 50.5 141.7 130.6
Earned Premiums 44.7 40.3 136.8 107.2
Underwriting Income $ 2.6 $ 1.9 $ 6.8 $ 3.1
Net Investment Income 3.6 2.7 10.4 7.8
-------- -------- -------- --------
Operating Income Before
Taxes $ 6.2 $ 4.6 $ 17.2 $ 10.9
======== ======== ======== ========
Loss Ratio 64.8 % 67.4 % 63.8 % 66.5 %
Expense Ratio 29.6 % 27.7 % 31.3 % 30.5 %
-------- -------- -------- --------
GAAP Combined Ratio 94.4 % 95.1 % 95.1 % 97.0 %
======== ======== ======== ========
GAAP Combined Ratio
excluding Cat Losses 88.9 % 92.3 % 92.9 % 95.9 %
======== ======== ======== ========
Risk Management
----------------------------
Gross Written Premiums $ 32.9 $ 52.3 $ 107.6 $ 136.9
Net Written Premiums 17.6 33.2 59.5 84.5
Earned Premiums 23.8 23.6 66.3 90.5
Underwriting Loss $ (8.8) $ (2.3) $ (9.3) $ (8.1)
Net Investment Income 8.3 7.1 24.1 21.8
-------- -------- -------- --------
Operating Income (Loss)
Before Taxes $ (0.5) $ 4.8 $ 14.8 $ 13.7
======== ======== ======== ========
Loss Ratio 92.5 % 66.7 % 66.4 % 64.7 %
Expense Ratio 44.2 % 42.8 % 47.6 % 44.2 %
--------- -------- --------- --------
GAAP Combined Ratio 136.7 % 109.5 % 114.0 % 108.9 %
======== ======== ======== ========
Public Entity
----------------------------
Gross Written Premiums $ 26.8 $ 43.0 $ 55.0 $ 74.7
Net Written Premiums 21.7 36.5 41.8 60.9
Earned Premiums 13.2 17.0 45.7 44.6
Underwriting Income (Loss) $ 0.3 $ (0.7) $ 2.0 $ 0.4
Net Investment Income 1.2 0.5 3.5 1.2
-------- -------- -------- --------
Operating Income (Loss)
Before Taxes $ 1.5 $ (0.2) $ 5.5 $ 1.6
======== ======== ======== ========
Loss Ratio 61.7 % 70.7 % 60.6 % 65.6 %
Expense Ratio 35.5 % 33.8 % 35.0 % 33.7 %
-------- -------- -------- --------
GAAP Combined Ratio 97.2 % 104.5 % 95.6 % 99.3 %
======== ======== ======== ========
GAAP Combined Ratio
excluding Cat Losses 91.4 % 96.2 % 93.9 % 96.2 %
======== ======== ======== ========
ARGONAUT GROUP, INC.
RECONCILIATION OF OPERATING INCOME TO NET INCOME
(in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2005 2004 2005 2004
------- ------- ------- -------
(unaudited) (unaudited)
Income (loss) before income tax
Excess & surplus lines 6.3 (3.7) 36.1 21.5
Select markets 6.2 4.6 17.2 10.9
Risk management (0.5) 4.8 14.8 13.7
Public entity 1.5 (0.2) 5.5 1.6
Run-off lines (6.3) - (6.3) -
Corporate & other (2.4) (8.0) (15.2) (16.0)
------- ------- ------- -------
Operating income before taxes 4.8 (2.5) 52.1 31.7
Net realized investment gains 0.4 0.8 1.7 2.8
------- ------- ------- -------
Total income before income tax 5.2 (1.7) 53.8 34.5
Benefit for income taxes (0.2) (11.1) (1.3) (11.1)
------- ------- ------- -------
Net income $ 5.4 $ 9.4 $ 55.1 $ 45.6
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