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2: EX-10.1 Material Contract HTML 169K
3: EX-10.2 Material Contract HTML 389K
4: EX-31.1 Certification -- §302 - SOA'02 HTML 33K
5: EX-31.2 Certification -- §302 - SOA'02 HTML 33K
6: EX-32.1 Certification -- §906 - SOA'02 HTML 31K
7: EX-32.2 Certification -- §906 - SOA'02 HTML 30K
13: R1 Cover HTML 88K
14: R2 Condensed Consolidated Balance Sheets HTML 144K
15: R3 Condensed Consolidated Balance Sheets HTML 63K
(Parenthetical)
16: R4 Condensed Consolidated Statements of Income (Loss) HTML 130K
17: R5 Condensed Consolidated Statements of Comprehensive HTML 94K
Income (Loss)
18: R6 Condensed Consolidated Statements of Shareholders' HTML 83K
Equity
19: R7 Condensed Consolidated Statements of Shareholders' HTML 33K
Equity (Parenthetical)
20: R8 Condensed Consolidated Statements of Cash Flows HTML 141K
21: R9 Business and Significant Accounting Policies HTML 45K
22: R10 Recently Issued Accounting Pronouncements HTML 40K
23: R11 Investments HTML 532K
24: R12 Allowance for Credit Losses HTML 45K
25: R13 Reserves for Losses and Loss Adjustment Expenses HTML 69K
26: R14 Disclosures about Fair Value of Financial HTML 90K
Instruments
27: R15 Shareholders' Equity HTML 38K
28: R16 Accumulated Other Comprehensive Income (Loss) HTML 76K
29: R17 Net Income (Loss) Per Common Share HTML 54K
30: R18 Supplemental Cash Flow Information HTML 42K
31: R19 Share-based Compensation HTML 55K
32: R20 Underwriting, Acquisition and Insurance Expenses HTML 45K
33: R21 Income Taxes HTML 126K
34: R22 Commitments and Contingencies HTML 32K
35: R23 Segment Information HTML 110K
36: R24 Subsequent Events HTML 33K
37: R25 Business and Significant Accounting Policies HTML 72K
(Policies)
38: R26 Investments (Tables) HTML 557K
39: R27 Allowance for Credit Losses (Tables) HTML 47K
40: R28 Reserves for Losses and Loss Adjustment Expenses HTML 66K
(Tables)
41: R29 Disclosures about Fair Value of Financial HTML 91K
Instruments (Tables)
42: R30 Accumulated Other Comprehensive Income (Loss) HTML 78K
(Tables)
43: R31 Net Income (Loss) Per Common Share (Tables) HTML 53K
44: R32 Supplemental Cash Flow Information (Tables) HTML 41K
45: R33 Share-based Compensation (Tables) HTML 49K
46: R34 Underwriting, Acquisition and Insurance Expenses HTML 45K
(Tables)
47: R35 Income Taxes (Tables) HTML 118K
48: R36 Segment Information (Tables) HTML 110K
49: R37 Business and Significant Accounting Policies - HTML 89K
Additional Information (Details)
50: R38 Investments - Additional Information (Detail) HTML 44K
51: R39 Investments - Schedule of Amortized Cost, Gross HTML 78K
Unrealized Gains, Gross Unrealized Losses and Fair
Value of Investments (Detail)
52: R40 Investments - Schedule of Amortized Cost and Fair HTML 65K
Values of Fixed Maturity Investments, by
Contractual Maturity (Detail)
53: R41 Investments - Schedule of Carrying Value and HTML 44K
Unfunded Investment Commitments of Other Invested
Assets Portfolio (Detail)
54: R42 Investments - Schedule of Aging of Unrealized HTML 79K
Losses on Company's Investments in Fixed
Maturities, Equity Securities and Other
Investments (Detail)
55: R43 Investments - Allowance for Credit Losses (Detail) HTML 60K
56: R44 Investments - Schedule of Commercial Mortgage HTML 46K
Loans (Details)
57: R45 Investments - Schedule of Loans by Ratio (Details) HTML 55K
58: R46 Investments - Schedule of Loans by Maturity HTML 49K
(Details)
59: R47 Investments - Schedule of Company's Gross Realized HTML 67K
Investment Gains (Losses) (Detail)
60: R48 Investments - Schedule of Changes in Unrealized HTML 39K
Appreciation (Depreciation) (Detail)
61: R49 Investments - Schedule of Fair Value of Foreign HTML 39K
Currency Exchange Forward Contracts (Detail)
62: R50 Investments - Schedule of Realized Gains and HTML 45K
Losses of Investment on Foreign Currency Exchange
Forward Contracts (Detail)
63: R51 Investments - Components of Restricted Assets HTML 45K
(Detail)
64: R52 Investments - Financial Assets Measured at Fair HTML 121K
Value on Recurring Basis (Detail)
65: R53 Investments - Schedule of Reconciliation of HTML 65K
Beginning and Ending Balances for Investments
Categorized as Level 3 (Detail)
66: R54 Investments - Commercial Mortgage Loans (Details) HTML 33K
67: R55 Allowance for Credit Losses - Premiums Receivable HTML 42K
(Details)
68: R56 Allowance for Credit Losses - Reinsurance HTML 40K
Recoverables (Details)
69: R57 Reserves for Losses and Loss Adjustment Expenses - HTML 66K
Reserves for Losses and Loss Adjustment Expenses
(Detail)
70: R58 Reserves for Losses and Loss Adjustment Expenses - HTML 33K
Narrative (Details)
71: R59 Reserves for Losses and Loss Adjustment Expenses - HTML 38K
Impact from (Favorable) Unfavorable Development of
Prior Accident Years' Loss and LAE Reserves on
Each Reporting Segment (Detail)
72: R60 Disclosures about Fair Value of Financial HTML 51K
Instruments - Summary of Company's Financial
Instruments Whose Carrying Amount Did Not Equal
Fair Value (Detail)
73: R61 Disclosures about Fair Value of Financial HTML 67K
Instruments - Summary of Fair Values Measured on
Recurring Basis (Details)
74: R62 Shareholders' Equity (Detail) HTML 64K
75: R63 Accumulated Other Comprehensive Income (Loss) - HTML 55K
Changes in Accumulated Other Comprehensive (Loss)
Income (Detail)
76: R64 Accumulated Other Comprehensive Income (Loss) - HTML 59K
Amounts Reclassified from Accumulated Other
Comprehensive (Loss) Income (Detail)
77: R65 Net Income (Loss) Per Common Share - Net Income HTML 77K
(Loss) Per Common Share on Basic and Diluted Basis
(Detail)
78: R66 Net Income (Loss) Per Common Share - Additional HTML 33K
Information (Detail)
79: R67 Supplemental Cash Flow Information - Schedule of HTML 44K
Interest Paid and Income Taxes Paid (Recovered)
(Detail)
80: R68 Share-based Compensation - Additional Information HTML 72K
(Detail)
81: R69 Share-based Compensation - Summary of Restricted HTML 57K
Share Activity (Detail)
82: R70 Share-based Compensation - Summary of Performance HTML 58K
Shares Activity (Details)
83: R71 Underwriting, Acquisition and Insurance Expenses HTML 39K
(Detail)
84: R72 Income Taxes - Additional Information (Detail) HTML 39K
85: R73 Income Taxes - Schedule of Pre-Tax Income (Loss) HTML 60K
and Effective Income Tax Rates (Detail)
86: R74 Income Taxes - Reconciliation of Difference HTML 60K
Between Provision for Income Taxes and Expected
Tax Provision at Weighted Average Tax Rate
(Detail)
87: R75 Commitments and Contingencies (Detail) HTML 31K
88: R76 Segment Information - Additional Information HTML 32K
(Detail)
89: R77 Segment Information - Revenue and Income (Loss) HTML 71K
Before Income Taxes for Each Segment (Detail)
90: R78 Segment Information - Schedule of Earned Premiums HTML 43K
by Geographic Location (Detail)
91: R79 Segment Information - Identifiable Assets (Detail) HTML 47K
92: R80 Subsequent Events (Details) HTML 45K
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(Exact name of registrant as specified in its charter)
iBermuda
i98-0214719
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
i90 Pitts Bay Road
P.O. Box HM 1282
iPembroke
iHM08
Hamilton
HM
FX
iBermuda
Bermuda
(Address of principal executive offices)
(Mailing address)
(Registrant’s telephone number, including area code):(i441)
i296-5858
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, Par Value of $1.00 Per Share
iARGO
iNew
York Stock Exchange
i6.500% Senior Notes Due 2042 issued by Argo Group U.S., Inc. and The Guarantee With Respect Thereto
iARGD
iNew
York Stock Exchange
iDepositary Shares, Each Representing a 1/1000th Interest in 7.00% Resettable Fixed Rate Preference Share, Series A, Par Value $1.00 Per Share
iARGOPrA
iNew
York Stock Exchange
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. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark whether the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
Indicate the number of shares outstanding (net of treasury shares) of each of the issuer’s classes of common shares as of November 7, 2022.
Equity
securities, at fair value (cost: 2022 - $i55.3; 2021 - $i70.3)
i43.9
i56.3
Other
investments (cost: 2022 - $i401.6; 2021 - $i387.0)
i401.6
i387.2
Short-term
investments, at fair value (amortized cost: 2022 - $i570.2; 2021 - $i655.4)
i570.7
i655.8
Total
investments
i4,905.1
i5,322.6
Cash
i99.4
i146.1
Accrued
investment income
i23.1
i20.9
Premiums
receivable
i656.5
i648.6
Reinsurance
recoverables
i3,015.8
i2,966.4
Goodwill
i136.1
i147.3
Intangible assets, net of accumulated amortization
i—
i17.3
Current
income taxes receivable, net
i2.8
i7.3
Deferred
tax asset, net
i151.8
i73.6
Deferred
acquisition costs, net
i183.4
i168.0
Ceded
unearned premiums
i450.8
i506.7
Operating
lease right-of-use assets
i60.3
i81.4
Other
assets
i173.6
i211.6
Total
assets
$
i9,858.7
$
i10,317.8
Liabilities
and Shareholders' Equity
Reserves for losses and loss adjustment expenses
$
i5,731.4
$
i5,595.0
Unearned
premiums
i1,404.9
i1,466.8
Accrued
underwriting expenses and other liabilities
i120.3
i166.6
Ceded
reinsurance payable, net
i503.1
i724.4
Funds
held
i253.7
i76.6
Senior
unsecured fixed rate notes
i140.5
i140.3
Other indebtedness
i52.5
i57.0
Junior
subordinated debentures
i258.5
i258.2
Operating
lease liabilities
i68.9
i97.7
Total
liabilities
i8,533.8
i8,582.6
Commitments
and contingencies (Note 14)
i
i
Shareholders' equity:
Preferred
shares and additional paid-in capital - $ii1.00/
par, ii30,000,000/ shares authorized;
ii6,000/ shares issued at September 30,
2022 and December 31, 2021, respectively; liquidation preference $ii25,000/
i144.0
i144.0
Common
shares - $ii1.00/ par, ii500,000,000/
shares authorized; i46,339,696 and i46,192,867 shares issued at September 30, 2022 and December
31, 2021, respectively
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. iiBusiness
and Significant Accounting Policies/
Business
The accompanying consolidated financial statements of Argo Group International Holdings, Ltd. and its subsidiaries (“Argo Group,”“we,”“us,”“our” or the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Argo Group is an underwriter of specialty insurance products in the property and casualty market.
The preparation
of interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The major estimates reflected in our consolidated financial statements include, but are not limited to, reserves for losses and loss adjustment expenses; reinsurance recoverables, including the reinsurance recoverables allowance for expected credit losses; estimates of written and earned premiums; reinsurance premium receivable; fair value of investments and assessment of potential impairment, including the allowance for credit losses on fixed maturity securities; valuation of goodwill and intangibles and our deferred tax asset valuation allowance. Actual results could materially differ from those estimates. 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 our Annual Report on Form 10-K and Form 10-K/A for the year ended December 31, 2021 filed with the Securities and Exchange Commission ("SEC") (collectively, “2021 Form 10-K”).
The interim financial information as of, and for, the three and nine months ended, September 30, 2022 and 2021 is unaudited. However, in the opinion of management, the interim information includes all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the results presented 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 in consolidation. iCertain reclassifications have been made to financial information presented for prior years to conform to the current year’s presentation.
Sale of Argo Underwriting Agency Limited
On September
8, 2022, Argo International Holdings Limited (the “Seller”), a wholly-owned subsidiary of the Company and Ohio Farmers Insurance Company (the “Buyer”), part of the Westfield group of insurance companies, entered into a sale and purchase agreement (the “Transaction”) under which the Seller agreed to sell, and the Buyer agreed to purchase, the entire issued share capital of Argo Underwriting Agency Limited (“AUA”).
The base cash consideration for the purchase is $i125.0 million,
which will be adjusted to reflect the extent by which AUA’s net assets as at completion are greater or lesser than AUA net assets as at March 31, 2022. As a result of the sale, an impairment was recorded in the amount of $i28.5 million, consisting of $i17.3 million
of indefinite lived intangible assets and $i11.2 million of goodwill, representing the difference between the carrying value and implied fair value as determined by the consideration to be received. In addition, the Buyer will be obliged to replace certain funds provided by the Company to support the activities of AUA and certain of its subsidiaries at Lloyd’s of London, which would then be released
to the Company.
The Transaction is subject to a number of closing conditions, including regulatory approvals from Lloyd’s of London, the UK Prudential Regulation Authority and the UK Financial Conduct Authority among others. None of the closing conditions or regulatory approvals were completed or received in advance of the execution of the purchase agreement. There can be no assurance that these required closing conditions or regulatory approvals will be met or received, or will be on terms acceptable to the parties. As of September 30, 2022, numerous closing conditions, including regulatory approvals, remained open.
In addition, the completion of certain closing conditions are not within the
Company’s control, and as such, uncertainty exists surrounding the timing and closure of the Transaction. Should the Transaction fail to be completed as a result of regulatory or other closing conditions, it is likely that significant changes to the Company’s plan of sale would be made. Although the Company is not aware of any specific issues that would prevent the closing of the Transaction, until the Company has received regulatory approval and
executed certain critical transactions which may involve third parties as part of the closing conditions, the Company cannot conclude as of September 30, 2022 that the closing of the Transaction is probable before September 30, 2023.
Loss Portfolio Transfer - U.S.
On August 8, 2022, the Company entered into a loss portfolio transfer agreement with a wholly owned subsidiary of Enstar Group Limited (“Enstar”) covering a majority of the
Company’s U.S. casualty insurance reserves, including construction, for accident years 2011 to 2019.
Enstar’s subsidiary will provide ground up cover of $i746.0 million of reserves, and an additional $i275.0 million
of cover in excess of $i821.0 million, up to a policy limit of $i1,096.0 million.
The Company will retain a loss corridor of $i75.0 million up to $i821.0 million.
For the nine months ended September 30, 2022, the Company recognized $i37.7 million of losses that fall within the corridor.
In addition, as a result of the anticipated loss portfolio transfer, the Company determined that it is more likely
than not it will be required to sell certain securities before recovery of its amortized cost. As such, the Company recognized $i34.2 million of realized losses related to the impairment of assets that will be transferred at fair value to a third party at the close of the transaction. These losses were previously a component of accumulated other comprehensive income. The impairment is included as a component of Net realized investment and other gains (losses)
in our Condensed Consolidated Statements of Income (Loss).
The transaction with Enstar closed on November 9, 2022. See Note 16, “Subsequent Events” for additional information.
Sale of ArgoGlobal SE
On June 22, 2022, we completed the sale of our Malta operations, ArgoGlobal Holdings (Malta) Ltd. and its subsidiaries (“AGSE”) to RiverStone Holdings Limited (part of the RiverStone International Group) for €i4.9 million
(approximately $i5.2 million), subject to the terms and conditions set forth in the purchase agreement. AGSE is one of the business units within our International Operations reporting segment. As a result, we realized a loss on the sale of AGSE of $i21.3 million,
which is included as a component of Net realized investment and other gains (losses) in our Condensed Consolidated Statements of Income (Loss). This amount includes $i4.5 million of losses from the realization of historical foreign currency translation, which was previously a component of accumulated other comprehensive income.
Loss Portfolio
Transfer - Syndicate 1200
In April 2022, Argo Managing Agency Limited, for and on behalf of Lloyd’s Syndicate 1200, reached an agreement to enter into a loss portfolio transfer of the 2018 and 2019 years of account to Riverstone Managing Agency Limited, for and on behalf of Lloyd's Syndicate 3500, retrospectively from January 1, 2022.
Sale of Argo Seguros Brasil S.A.
On February 15, 2022, we completed the sale of our Brazilian operations, Argo Seguros Brasil S.A. (“Argo Seguros”), to Spice Private Equity Ltd., an investment company focused on global private equity investments, for a final purchase price of i140 million
Brazilian Reais (approximately $i26.9 million), subject to the terms and conditions set forth in the purchase agreement. Argo Seguros is one of the business units within our International Operations reporting segment. As a result, we realized a loss on the sale of Argo Seguros of $i33.8
million in 2022, which is included as a component of Net realized investment and other gains (losses) in our Condensed Consolidated Statements of Income (Loss). This amount includes $i27.3 million of losses from the realization of historical foreign currency translation, which was previously a component of accumulated other comprehensive income. We previously recognized a $i6.3 million
loss during 2021 as we adjusted the carrying value of Argo Seguros to its fair value.
Basis of Presentation and Use of Estimates
i
Commercial Mortgage Loans
Commercial mortgages are carried at unpaid principal balances less allowance for credit losses, plus or minus adjustments for the accretion or amortization of discount or premium. Interest income on such loans is accrued as earned.
Non-operating expenses represent costs not associated with our ongoing insurance or other operations, including severance expenses, certain legal costs, merger and acquisition and other transaction-related expenses, and certain non-recurring expenses.
2. iRecently
Issued Accounting Pronouncements
The Company evaluated recently issued accounting pronouncements and determined none are material to our results of operations or financial position reported herein.
3. iInvestments
Included
in Total investments in our Consolidated Balance Sheets at September 30, 2022 and December 31, 2021 is $i56.4 million and $i89.6
million, respectively, of assets managed on behalf of the trade capital providers, who are third-party participants that provide underwriting capital to the operations of Syndicates 1200 and 1910.
Fixed Maturities
i
The amortized cost, gross unrealized gains, gross unrealized losses, allowance for credit losses, and fair value of fixed maturity investments were
as follows:
The amortized cost and fair values of fixed maturity investments as of September 30, 2022, by contractual maturity, were as follows:
(in
millions)
Amortized Cost
Fair Value
Due in one year or less
$
i174.0
$
i170.8
Due
after one year through five years
i1,921.3
i1,783.4
Due
after five years through ten years
i647.5
i542.1
Due
after ten years
i64.7
i51.6
Structured
securities
i1,324.0
i1,182.4
Total
$
i4,131.5
$
i3,730.3
/
The
actual maturities may differ from the contractual maturities because debtors may have the right to call or prepay obligations.
Other Investments
i
Details regarding the carrying value and unfunded investment commitments of other investments
as of September 30, 2022 and December 31, 2021 were as follows:
•Hedge funds: Hedge funds, carried at net asset value (“NAV”) as a practical expedient of fair value, include funds that primarily buy and sell stocks, including short sales, multi-strategy credit, relative value credit and distressed credit.
•Private equity: Private equity includes buyout funds, real asset/infrastructure funds, credit special situations funds, mezzanine lending funds and direct investments and strategic non-controlling minority investments in private companies that are principally accounted for using the equity method of accounting.
•Overseas deposits: Overseas deposits are principally invested in short-term sovereign fixed income
and investment grade corporate securities.
•Other: Other includes participation in investment pools.
We
hold a total of i5,020 fixed maturity securities, of which i1,115
were in an unrealized loss position for less than one year and i306 were in an unrealized loss position for a period one year or greater as of September 30, 2022. The unrealized losses as of September 30, 2022 are primarily driven from interest rate movements.
i
Allowance
for Credit Losses
For fixed maturities with a decline in fair value below the amortized cost due to credit-related factors, an allowance is established for the difference between the estimated recoverable value and amortized cost with a corresponding charge to Net investment and other gains (losses) in the Condensed Consolidated Statements of Income (Loss). The allowance is limited to the difference between amortized cost and fair value. The estimated recoverable value is the present value of cash flows expected to be collected, as determined by management. The difference between fair value and amortized cost that is not associated with credit-related factors is recognized in the Condensed Consolidated Statements of Comprehensive Income (Loss). Accrued interest is excluded from the measurement of the allowance for credit losses.
When
determining if a credit loss has been incurred, we may consider the historical performance of the security, available market information and security specific considerations such as the priority payment of the security. In addition, inputs used in our analysis include, but are not limited to, credit ratings and downgrades, delinquency rates, missed scheduled interest or principal payments, purchase yields, underlying asset performance, collateral types, modeled default rates, modeled severity rates, call/prepayment rates, expected cash flows, industry concentrations, and potential or filed bankruptcies or restructurings.
In cooperation with
our investment managers, we evaluate for credit losses each quarter utilizing a bottom up review approach. At the security level, a determination is made as to whether a decline in fair value below the amortized cost basis is due to credit-related or noncredit-related factors. If we determine that all or a portion of a fixed maturity is uncollectible, the uncollectible amortized cost is written off with a corresponding reduction to the allowance for credit losses. If we collect cash flows that were previously written off, the recovery is recognized in realized investment gains. We also consider whether we intend to sell an available-for-sale security or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost. In these instances, a decline in fair value is recognized in Net investment and other gains (losses) in the Condensed Consolidated Statements of Income (Loss)
based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security.
i
The following table presents a roll-forward of the changes in allowance for credit losses on available-for-sale fixed maturities by industry category for the three and nine months ending September 30, 2022 and 2021, respectively:
Total
credit impairment (gains) losses, net of allowance for credit losses, included in Net investment and other gains (losses) in the Condensed Consolidated Statements of Income (Loss) was $i1.3 million and $i2.9 million
for the three and nine months ended
September 30, 2022, respectively. Total credit impairment (gains) losses, net of allowance for credit losses, included in Net investment and other gains (losses) in the Condensed Consolidated Statements of Income was $i0.8 million
and $i1.5 million for the three and nine months ended September 30, 2021, respectively.
For commercial mortgage loans an allowance for credit losses is established at the time of origination or purchase, as necessary, and is updated each reporting period. Changes in the allowance for credit losses are recorded in Net investment and other
gains (losses). This allowance reflects the risk of loss, even when that risk is remote, that is expected over the remaining contractual life of the loan. The allowance for credit losses considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts of future economic conditions.
Commercial Mortgage Loans
Commercial mortgage loan investments are composed of participation interests in a portfolio of commercial mortgage loans. Loan collateral is diversified with regard to property type and geography. iThe
following table presents loans by property type:
We enter into foreign currency exchange forward contracts to manage operational currency exposure from our non-USD insurance operations, and gain exposure to a total return strategy which invests in multiple currencies. The currency forward contracts are carried at fair value in our Condensed Consolidated Balance Sheets in Other liabilities and Other assets at September 30, 2022 and December 31, 2021, respectively. The net realized
gains and (losses) are included in Net realized investment and other gains (losses) in our Condensed Consolidated Statements of Income (Loss).
Regulatory Deposits, Pledged Securities and Letters of Credit
We are required to maintain assets on deposit with various regulatory authorities to support our insurance and reinsurance operations. We maintain assets pledged as collateral in support of irrevocable letters of credit issued under the terms of certain reinsurance agreements for reported loss and loss expense reserves. iThe
following table presents our components of restricted assets:
Securities on deposit for regulatory and other purposes
$
i158.5
$
i195.6
Securities
pledged as collateral for letters of credit and other
i178.5
i193.9
Securities
on deposit supporting Lloyd’s business (1)
i257.0
i296.8
Total
restricted investments
$
i594.0
$
i686.3
(1)
Argo Group is required to maintain Funds at Lloyd’s (“FAL”) to support its business for Syndicate 1200 and Syndicate 1910. At September 30, 2022 the amount of securities pledged for FAL was $i257.0 million, of which $i134.0 million
was provided by Argo Re, Ltd.
i
Fair Value Measurements
Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal
market for the asset or liability, or in the absence of a principal market, the most advantageous market. Market participants are buyers and sellers in the principal (or most advantageous) market that are independent, knowledgeable, able to transact for the asset or liability and willing to transfer the asset or liability.
Valuation techniques consistent with the market approach, income approach and/or cost approach are used to measure fair value. The inputs of these valuation techniques are categorized into three levels.
•Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the reporting date. We define actively traded as a security that has traded in the past seven days.
•Level 2 inputs are inputs other than quoted
prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. We receive one quote per instrument for Level 2 inputs.
•Level 3 inputs are unobservable inputs. Unobservable inputs reflect our own judgments about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.
To validate the fair value of investments in the Company’s financial statements, we receive prices from multiple sources including third-party pricing services and our outside investment managers. Through a comparative analysis, the Company validates the reasonableness of its valuations. These
prices are determined using observable market information such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. We have reviewed the processes used by the third-party providers for pricing the securities and have determined that these processes result in fair values consistent with GAAP requirements. In addition, we review these prices for reasonableness, and have not adjusted any prices received from the third-party providers as of September 30, 2022 and December 31, 2021. A description of the valuation techniques we use to measure assets at fair value is as follows:
Fixed Maturities (Available-for-Sale) Levels 1 and 2:
•United
States Treasury securities are typically valued using Level 1 inputs. For these securities, we obtain fair value measurements from third-party pricing services using quoted prices (unadjusted) in active markets at the reporting date.
•United States Government agencies, non-U.S. Government securities, obligations of states and political subdivisions, credit securities and foreign denominated government and credit securities are reported at fair value using Level 2 inputs. For these securities, we obtain fair value measurements from third-party pricing services. Observable data may include dealer quotes, market spreads, yield curves, live trading levels, trade execution data, credit information and the security’s terms and conditions, among other things.
•Asset and mortgage-backed securities and collateralized loan obligations are reported
at fair value using Level 2 or Level 3 inputs. For these securities, we obtain fair value measurements from third-party pricing services. Observable data may include dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.
Fixed Maturities (Available-for-Sale) Levels 3: We own term loans that are valued using unobservable inputs.
Equity Securities Level 1: Equity securities are principally
reported at fair value using Level 1 inputs. For these securities, we obtain fair value measurements from a third-party pricing service using quoted prices (unadjusted) in active markets at the reporting date.
Equity Securities Level 3: We own certain equity securities that are reported at fair value using Level 3 inputs. The valuation techniques for these securities include the following:
•Fair value measurements for an investment in an equity fund obtained by applying final prices provided by the administrator of the fund, which is based upon certain estimates and assumptions.
•Fair value measurements from brokers and independent valuation services, both based upon estimates, assumptions and other unobservable inputs.
Other
Investments Level 2: Foreign regulatory deposits are assets held in trust in jurisdictions where there is a legal and regulatory requirement to maintain funds locally in order to protect policyholders. Lloyd’s is the appointed investment manager for the funds. These assets are invested in short-term government securities, agency securities and corporate bonds and are valued using Level 2 inputs based upon values obtained from Lloyd’s.
Short-term Investments: Short-term investments are principally reported at fair value using Level 1 inputs, with the exception of short-term corporate and governmental bonds reported at fair value using Level 2 inputs as described in the fixed maturities section above. Values for the investments categorized as Level 1 are obtained from various financial institutions as of the reporting date.
i
Based
on an analysis of the inputs, our financial assets and liabilities measured at fair value on a recurring basis have been categorized as follows:
(1)
Quoted prices in active markets for identical assets
(2) Significant other observable inputs
(3) Significant unobservable inputs
The fair value measurements in the tables above do not equal Total investments on our Consolidated Balance Sheets as they primarily exclude other investments that are accounted for under the equity-method of accounting as well as hedge funds which are carried at NAV as a practical expedient.
i
A
reconciliation of the beginning and ending balances for the investments categorized as Level 3 are as follows:
Fair Value Measurements Using Unobservable Inputs (Level 3)
Amount
of total gains or losses for the year included in net income attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2022
Amount
of total gains or losses for the year included in net income attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2021
$
i—
$
i—
$
i—
At
September 30, 2022 and December 31, 2021, we did not have any financial assets or financial liabilities measured at fair value on a nonrecurring basis or any financial liabilities on a recurring basis.
i
The Company holds investments in commercial mortgage loans reported at cost, less an allowance for expected credit losses, on the Balance
Sheet. As of September 30, 2022, the cost and estimated fair value of the investments in commercial mortgage loans were:
The
following table represents the balances of premiums receivable, net of allowance for expected credit losses, at September 30, 2022 and January 1, 2022, and the changes in the allowance for expected credit losses for the nine months ended September 30, 2022.
(in millions)
Premiums Receivable, Net of Allowance for Estimated Uncollectible Premiums
(1)Includes
allowance transferred as a result of divestitures in the amount of $i1.5 million.
/i
Reinsurance
Recoverables
The following table presents the balances of reinsurance recoverables, net of the allowance for estimated uncollectible reinsurance, at September 30, 2022 and January 1, 2022, and changes in the allowance for estimated uncollectible reinsurance for the nine months ended September 30, 2022.
(in millions)
Reinsurance
Recoverables, Net of Allowance for Estimated Uncollectible Reinsurance
We
primarily utilize A.M. Best credit ratings when determining the allowance, and adjust as needed based on our historical experience with the reinsurers. A portion of our reinsurance recoverables are collateralized by letters of credit, funds held or trust agreements.
5. iReserves
for Losses and Loss Adjustment Expenses
i
The following table provides a reconciliation of reserves for losses and loss adjustment expenses (“LAE”):
For
the Nine Months Ended September 30,
(in millions)
2022
2021
Net reserves beginning of the year
$
i3,123.2
$
i2,906.1
Add:
Losses
and LAE incurred during current calendar year, net of reinsurance:
Current accident year
i826.8
i884.9
Prior
accident years
i31.6
i6.0
Losses
and LAE incurred during calendar year, net of reinsurance
i858.4
i890.9
Deduct:
Losses
and LAE payments made during current calendar year, net of reinsurance:
Current accident year
i112.0
i100.5
Prior
accident years
i623.2
i552.8
Losses
and LAE payments made during current calendar year, net of reinsurance:
i735.2
i653.3
Divestitures
(1)
(i35.2)
i—
Net
reserves ceded:
Loss portfolio transfer (for years of account 2019 and 2018) (2)
(i175.5)
i—
Reinsurance
to close transaction (for years of account 2017 and prior) (3)
i—
i219.7
Change
in participation interest (4)
i32.2
i12.5
Foreign
exchange adjustments
(i10.6)
(i7.3)
Net
reserves - end of period
i3,057.3
i2,929.2
Add:
Reinsurance
recoverables on unpaid losses and LAE, end of period
i2,674.1
i2,510.3
Gross
reserves - end of period
$
i5,731.4
$
i5,439.5
(1)Refer
to the sale of Argo Seguros and AGSE in Note 1, “Business and Significant Accounting Policies” for additional information.
(2)Loss portfolio transfer on Syndicate 1200's reserves for the 2018 and 2019 years of account. Refer to Note 1, “Business and Significant Accounting Policies” for additional information.
(3)Amount represents reserves ceded under the reinsurance to close transaction with RiverStone for Lloyd’s years of account 2017 and prior, effective January 1, 2021.
(4)Amount represents the change in reserves due to changing our participation in Syndicates 1200 and 1910.
/
Reserves
for losses and LAE represent the estimated indemnity cost and related adjustment expenses necessary to investigate and settle claims. Such estimates are based upon individual case estimates for reported claims, estimates from ceding companies for reinsurance assumed and actuarial estimates for losses that have been incurred but not yet reported to the insurer. Any change in probable ultimate liabilities is reflected in current operating results.
Underwriting results for the nine months ended September 30, 2022 included net losses and loss adjustment expenses for Hurricane Ian of $i23.4
million.
i
The impact from the (favorable) unfavorable development of prior accident years’ loss and LAE reserves on each reporting segment is presented below:
For
the Nine Months Ended September 30,
(in millions)
2022
2021
U.S. Operations
$
i27.9
$
(i0.7)
International
Operations
i0.8
i0.1
Run-off
Lines
i2.9
i6.6
Total
(favorable) unfavorable prior-year development
The following describes the primary factors behind each segment’s prior accident year reserve development for the nine months ended September 30, 2022 and 2021:
•U.S. Operations: Unfavorable development primarily related to liability and property lines, including the impact of large losses, partially offset by favorable development in specialty lines. The unfavorable prior year development was largely driven by businesses we have exited, and relates to accident years 2019 and prior partially offset by favorable prior year development on accident years 2020 and 2021.
•International
Operations: Unfavorable development primarily related to unfavorable movements in professional lines in Argo Insurance Bermuda, partially offset by favorable development in Syndicate 1200 property and liability lines.
•Run-off Lines: Unfavorable loss reserve development on prior accident years in other run-off lines.
•U.S. Operations: Favorable development primarily in specialty lines, partially offset by unfavorable development in liability and professional lines.
•International Operations: Unfavorable development primarily related to a
one-time accounting adjustment and large claim movements in Argo Insurance Bermuda, partially offset by favorable development in property lines, including losses associated with prior year catastrophe losses.
•Run-off Lines: Unfavorable loss reserve development on prior accident years in risk management workers compensation, other run-off lines and an individual environmental loss.
Our reserves represent the best estimate of our ultimate liabilities, based on currently known facts, current law, current technology and reasonable assumptions where facts are not known. Due to the significant uncertainties and related management judgments, there can be no assurance that future favorable or unfavorable loss development, which may be material, will not occur.
6. iiDisclosures
About Fair Value of Financial Instruments/
Cash. The carrying amount approximates fair value.
Investment securities and short-term investments. See Note 3, “Investments,” for additional information.
Premiums receivable and reinsurance recoverables on paid losses. The carrying value of current receivables and reinsurance recoverables on paid losses approximates fair value.
Debt. At September 30, 2022 and December 31, 2021, the fair value of our debt
instruments is determined using both Level 1 and Level 2 inputs, as previously defined in Note 3, “Investments.”
We receive fair value prices from third-party pricing services for our financial instruments as well as for similar financial instruments. These prices are determined using observable market information such as publicly traded quoted prices, and trading prices for similar financial instruments actively being traded in the current market. We have reviewed the processes used by the third-party providers for pricing the instruments and have determined that these processes result in fair values consistent with GAAP requirements. In addition, we review these prices for reasonableness, and have not adjusted any prices received from the third-party providers as of September 30, 2022 and December 31, 2021. A description
of the valuation techniques we use to measure these liabilities at fair value is as follows:
Senior Unsecured Fixed Rate Notes Level 1:
•Our senior unsecured fixed rate notes are valued using Level 1 inputs. For these securities, we obtain fair value measurements from a third-party pricing service using quoted prices (unadjusted) in active markets at the reporting date.
Junior Subordinated Debentures and Floating Rate Loan Stock Level 2:
•Our trust preferred debentures,
subordinated debentures and floating rate loan stock are typically valued using Level 2 inputs. For these securities, we obtain fair value measurements from a third-party pricing service using quoted prices for similar securities being traded in active markets at the reporting date, as our specific debt instruments are less frequently traded.
A summary of our financial instruments whose carrying value did not equal fair value is shown below:
On August 4, 2022, our Board of Directors declared a quarterly cash dividend in the amount of $i0.31 on each common share outstanding. On September 15, 2022, we paid $i11.2
million to our shareholders of record on August 31, 2022.
On August 4, 2022, our Board of Directors declared a quarterly cash dividend in the amount of $i437.50 per share on our i7.00%
Resettable Fixed Rate Preference Shares, Series A, par value of $i1.00 per share, with a liquidation preference of $i25,000 per share (the “Series A Preference
Shares”). Holders of depositary shares, each representing a 1/1,000th interest in a Series A Preference Share (the “Depositary Shares”), received $i0.43750 per Depositary Share. On September 15, 2022, we paid $i2.6
million to our shareholders of record of Series A Preference Shares on August 31, 2022.
On August 6, 2021, our Board of Directors declared a quarterly cash dividend in the amount of $i0.31 on each common share outstanding. On September 15, 2021, we paid $i10.8 million
to our shareholders of record on August 31, 2021.
On August 6, 2021,our Board of Directors declared a quarterly cash dividend in the amount of $i437.50 per share on our i7.00%
Resettable Fixed Rate Preference Shares, Series A, par value of $i1.00 per share, with a liquidation preference of $i25,000 per share (the “Series A Preference
Shares”). Holders of depositary shares, each representing a 1/1,000th interest in a Series A Preference Share (the “Depositary Shares”), received $i0.43750 per Depositary Share. On September 15, 2021, we paid $i2.6 million
to our shareholders of record of Series A Preference Shares on August 31, 2021.
Stock Repurchases
On May 3, 2016, our Board of Directors authorized the repurchase of up to $i150.0 million of our common shares (“2016 Repurchase Authorization”). The 2016 Repurchase Authorization supersedes all previous repurchase authorizations. As of September 30,
2022, availability under the 2016 Repurchase Authorization for future repurchases of our common shares was $i53.3 million.
A
summary of changes in accumulated other comprehensive (loss) income, net of taxes (where applicable) by component for the nine months ended September 30, 2022 and 2021 is presented below:
The amounts reclassified from accumulated other comprehensive income (loss) shown in the above table have been included in the following captions in our Condensed Consolidated Statements of Income (Loss):
For
the Three Months Ended September 30,
For the Nine Months Ended September 30,
(in millions)
2022
2021
2022
2021
Unrealized gains and losses on securities:
Net
realized investment gains (losses) (1)
$
i47.5
$
i8.2
$
i42.1
$
(i11.0)
Provision
for income taxes
(i9.8)
(i0.4)
(i8.8)
i1.9
Foreign
currency translation adjustments:
Net realized foreign currency translation losses (2)
i—
i—
i31.8
i—
Total,
net of taxes
$
i37.7
$
i7.8
$
i65.1
$
(i9.1)
(1)
Net realized investment gains (losses) includes losses realized as a result of the Loss Portfolio Transfer - U.S. Refer to the sale of Argo Underwriting Agency Limited in Note 1, “Business and Significant Accounting Policies” for additional information.
(2) Foreign currency translation losses were realized as a result of the sale of Argo Seguros and AGSE. Refer to the sale of Argo Seguros and AGSE in Note 1, “Business and Significant Accounting Policies” for additional information.
/
Income tax effects are released from accumulated other comprehensive income (loss) for unrealized gains or losses
when the gains or losses are realized, and are taxed at the statutory rate based on jurisdiction of the underlying transaction.
9. iNet Income (Loss) Per Common Share
i
The
following table presents the calculation of net income (loss) per common share on a basic and diluted basis:
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
(in
millions, except number of shares and per share amounts)
2022
2021
2022
2021
Net income (loss)
$
(i48.8)
$
i22.4
$
(i66.0)
$
i122.0
Less:
Preferred share dividends
i2.6
i2.6
i7.9
i7.9
Net
income (loss) attributable to common shareholders
(ii51.4/)
ii19.8/
(ii73.9/)
ii114.1/
Weighted
average common shares outstanding - basic
i35,014,182
i34,852,274
i34,955,787
i34,794,078
Effect
of dilutive securities:
Equity compensation awards
i—
i181,976
i—
i265,888
Weighted
average common shares outstanding - diluted
i35,014,182
i35,034,250
i34,955,787
i35,059,966
Net
income (loss) per common share:
Basic
$
(i1.47)
$
i0.57
$
(i2.11)
$
i3.28
Diluted
$
(i1.47)
$
i0.56
$
(i2.11)
$
i3.26
/
Excluded
from the weighted average common shares outstanding calculation at September 30, 2022 and 2021 are ii11,318,339/
shares, which are held as treasury shares. The shares are excluded as of their repurchase date. Excluded from the computation of diluted net loss per common shares were i9,049 and i96,973
potentially dilutive shares for the three and nine months ended September 30, 2022, respectively. The potentially dilutive shares were excluded due to the net loss incurred for the periods presented. For the three and nine months ended September 30, 2021, i26,422 and i49,796,
respectively, weighted average shares were excluded from the computation of diluted net income per common shares as they were antidilutive.
iInterest paid and income taxes paid (recovered) were as follows:
For the Nine Months
Ended September 30,
(in millions)
2022
2021
Senior unsecured fixed rate notes
$
i7.0
$
i7.0
Junior
subordinated debentures
i9.0
i7.5
Other
indebtedness
i1.0
i1.5
Total
interest paid
$
i17.0
$
i16.0
Income
taxes paid
$
i26.2
$
i30.7
Income
taxes recovered
(i0.5)
(i1.2)
Income
taxes paid, net
$
i25.7
$
i29.5
/
11. iShare-based Compensation
Argo Group’s 2019 Omnibus Incentive Plan
In May 2019, our shareholders approved the 2019 Omnibus Incentive Plan (the “2019 Plan”), which provides equity-based and cash-based incentives to key employees and non-employee
directors. The intent of the 2019 Plan is to encourage and provide for the acquisition of an ownership interest in Argo Group, enabling us to attract and retain qualified and competent persons to serve as members of our management team and Board of Directors. The 2019 Plan authorizes i1,885,000 common shares to be granted as equity-based awards. No further grants will be made under any prior plan; however, any awards under a prior plan that are outstanding
as of the effective date shall remain subject to the terms and conditions of, and be governed by, such prior plan.
Awards granted under the 2019 Plan may be in the form of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance awards, other stock-based awards or other cash-based awards. Awards may be granted either alone, in addition to or in tandem with other awards authorized under the 2019 Plan. Awards that are settled in stock will count as one share for the purposes of reducing the share reserve under the 2019 Plan. Shares issued under this plan may be shares that are authorized and unissued or shares that we have reacquired, including shares purchased on the open market.
Stock options and stock appreciation rights are required to have an exercise price that is not less than the fair market value on the date of grant. The
term of these awards is not to exceed iten years.
Restricted Shares
i
A
summary of non-vested restricted share activity as of September 30, 2022 and changes during the nine months then ended is as follows:
The
restricted shares generally vest over one to ifour years. Expense recognized under this plan for the restricted shares was $i3.2 million
and $i6.5 million for the three and nine months ended September 30, 2022, respectively, as compared to $i1.4 million
and $i4.3 million for the three and nine months ended September 30, 2021, respectively. Compensation expense for all share-based compensation awards is included in Underwriting, acquisition and insurance expenses in the accompanying Condensed Consolidated Statements of Income (Loss). As of September 30, 2022, there was $i13.2 million
of total unrecognized compensation cost related to restricted share compensation arrangements granted by Argo Group.
We have issued to certain key employees non-vested restricted stock awards whose vesting is subject to the achievement of certain performance measures. The non-vested performance share awards vest over three to ifour
years. Non-vested performance share awards are valued based on the fair market value as of the grant date. Vesting of the awards is subject to the achievement of defined performance measures and the number of shares vested may be adjusted based on the achievement of certain targets. We evaluate the likelihood of the employee achieving the performance condition and include this estimate in the determination of the forfeiture factor for these grants.
i
A summary of non-vested performance share activity
as of September 30, 2022 and changes during the nine months then ended is as follows:
Expense
recognized under this plan for the performance shares was $i0.5 million for the three months ended September 30, 2022, compared to $i0.2 million
for the three months ended September 30, 2021. For the nine months ended September 30, 2022, we recouped expense of $i0.1 million, compared to expense of $i1.8 million
for the nine months ended September 30, 2021. The recoupment of expenses recognized for the nine months ended September 30, 2022 was primarily attributable to the forfeiture of awards due to the departure of our former president and chief executive officer. As of September 30, 2022, there was $i3.5 million
of total unrecognized compensation cost related to performance share compensation arrangements granted by Argo Group.
Stock-settled Share Appreciation Rights
In June 2022, we issued i135,000 stock-settled share appreciation rights (“SSARs”) to our Chief Executive Officer. The SSARs will vest
on a pro rata basis over a ithree year period, and have an exercise price of $i43.80
per share. We valued the shares using the Black Scholes model, which resulted in a grant date fair value of $i8.28 per share. As of September 30, 2022, we recognized $i0.1 million
in expense. Unamortized expense at September 30, 2022 was $i1.0 million.
12. iUnderwriting,
Acquisition and Insurance Expenses
i
Underwriting, acquisition and insurance expenses were as follows:
For
the Three Months Ended September 30,
For the Nine Months Ended September 30,
(in millions)
2022
2021
2022
2021
Commissions
$
i72.7
$
i88.0
$
i211.9
$
i236.2
Other
underwriting and insurance expenses
i97.5
i105.1
i297.9
i315.7
Total
underwriting, acquisition and insurance expenses before deferral
i170.2
i193.1
i509.8
i551.9
Net
deferral of policy acquisition costs
(i9.2)
(i16.0)
(i14.9)
(i21.1)
Total
underwriting, acquisition and insurance expenses
$
i161.0
$
i177.1
$
i494.9
$
i530.8
/
13. iIncome
Taxes
We are incorporated under the laws of Bermuda and, under current Bermuda law, are not obligated to pay any taxes in Bermuda based upon income or capital gains. We have received an undertaking from the Supervisor of Insurance in Bermuda pursuant to the provisions of the Exempted Undertakings Tax Protection Amendment Act, 2011, which exempts us from any Bermuda taxes computed on profits, income or any capital asset, gain or appreciation or any tax in the nature of estate, duty or inheritance tax, at least until the year 2035.
Argo Group International Holdings, Ltd. does not consider itself
to be engaged in a trade or business in the U.S. or the U.K. and, accordingly, does not expect to be subject to direct U.S. or U.K. income taxation.
We have subsidiaries based in the U.K. that are subject to the tax laws of that country. Under current law, these subsidiaries are taxed at the applicable corporate tax rates. Certain of the U.K. subsidiaries are deemed to be engaged in business in the U.S., and therefore, are subject to U.S. corporate tax in respect of a proportion of their U.S. underwriting business only. Relief is available against the U.K. tax liabilities in respect of overseas taxes paid that arise from the underwriting business. Our
U.K. subsidiaries file separate U.K. income tax returns.
We have subsidiaries based in the U.S. that are subject to U.S. tax laws. Under current law, these subsidiaries are taxed at the applicable corporate tax rates. Our U.S. subsidiaries file a consolidated U.S. federal income tax return.
We also have operations in Ireland, Italy, and Switzerland, which also are subject to income taxes imposed by the jurisdiction in which they operate. During 2022, our operations in Brazil and Malta were divested. We also have operations
in Barbados and the United Arab Emirates, which are not subject to income tax under the laws of those countries.
On June 10, 2021, U.K. tax legislation referred to as Finance Act 2021 received Royal Assent and was enacted. The effects of changes in tax laws and tax rates are recognized in the period of enactment. Accordingly, we recorded the impacts of Finance Act 2021 in our June 30, 2021 consolidated financial statements which primarily includes the remeasurement of our deferred tax assets and liabilities for the increased U.K. federal tax rate from 19% to 25% beginning on April 1, 2023.
On August 16, 2022, U.S. tax legislation referred to as the Inflation Reduction Act of 2022 was
enacted. The Company does not anticipate an impact to our financial statements in regards to the recent legislative change.
Our expected income tax provision computed on pre-tax income (loss) at the weighted average tax rate has been calculated as the sum of the pre-tax income (loss) in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. iFor the three
and nine months ended September 30, 2022 and 2021, pre-tax income (loss) attributable to our operations and the corresponding operations’ effective tax rates were as follows:
Our
effective tax rate may vary significantly from period to period depending on the jurisdiction generating the pre-tax income (loss) and its corresponding statutory tax rate. The geographic distribution of pre-tax income (loss) can fluctuate significantly between periods given the inherent nature of our business.
i
A reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate is as follows:
For
the Three Months Ended September 30,
For the Nine Months Ended September 30,
(in millions)
2022
2021
2022
2021
Income tax provision at expected rate
$
(i7.8)
$
i5.6
$
i11.1
$
i28.4
Tax
effect of:
Nontaxable investment income
(i0.1)
(i0.1)
(i0.3)
(i0.4)
Foreign
exchange adjustments
i—
i0.2
i0.8
(i0.3)
Goodwill
and intangible assets
i5.5
—
i—
i5.5
i—
Withholding
taxes
i—
i—
i—
i0.1
Sale
of Brazil and Malta Operations
i0.1
i—
i6.6
i—
Change
in uncertain tax position liability
i—
(i0.4)
i0.6
(i2.3)
Change
in valuation allowance
(i1.3)
i0.8
(i6.7)
(i1.1)
Impact
of change in tax rate related to Finance Act 2021
Our gross deferred tax assets are supported by taxes paid in previous periods, reversal of taxable temporary differences and recognition of future taxable income. Management regularly evaluates the recoverability of the deferred tax assets and makes any necessary adjustments to them based upon any changes in management’s expectations of future taxable income. Realization of deferred tax assets is dependent upon our generation of future taxable income sufficient to recover tax benefits that cannot be recovered from taxes paid in the carryback period, generally for our U.S. property and casualty insurers itwo
years for net operating losses and for all our U.S. subsidiariesithree years for capital losses. If a company determines that any of its deferred tax assets will not result in future tax benefits, a valuation allowance must be established for the portion of these assets that are not expected to be realized. For the three and nine months ended September 30, 2022, the net change in valuation allowance for deferred tax assets was a decrease of $i1.3
million and $i6.7 million, respectively, relating to the following: Internal Revenue Code Section 382 limited net operating loss carryforwards within the United States, cumulative losses incurred since inception, and valuation allowances acquired through or related to acquisitions or disposals. Based upon a review of our available evidence, both positive and negative discussed above, our management concluded that it is more-likely-than-not that the other deferred
tax assets will be realized.
For any uncertain tax positions not meeting the “more-likely-than-not” recognition threshold, accounting standards require recognition, measurement and disclosure in a company’s financial statements. For the three and nine months ended September 30, 2022, the Company had a net increase of uncertain tax positions in the amount of $i0.0 million
and $i0.6 million related to state income tax liability. Separately, a net increase of interest in the amount of $i0.1
million and $i0.2 million has been recorded in the line item Interest expense in our Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2022. No change to penalties were recorded for the three and nine months ended September 30, 2022.
Our U.S. subsidiaries are no longer subject
to U.S. federal and state income tax examinations by tax authorities for years before 2018. Our U.K. subsidiaries are no longer subject to U.K. income tax examinations by Her Majesty’s Revenue and Customs for years before 2020.
14. iCommitments and Contingencies
Argo
Group’s subsidiaries are parties to legal actions incidental to their business. As of September 30, 2022, management believed that the resolution of these matters would not materially affect our financial condition or results of operations. See Note 16, “Subsequent Events” for information regarding the securities class action lawsuit filed against the Company on October 20, 2022.
We have contractual commitments to invest up to $i116.3
million related to our limited partnership investments at September 30, 2022, as further disclosed in Note 3, “Investments.” These commitments will be funded as required by the partnership agreements which can be called to be fulfilled at any time, not to exceed itwelve years.
On November 9, 2022, the U.S. Loss Portfolio Transaction with Enstar covering a majority of the Company’s U.S. casualty insurance reserves,
including construction, for accident years 2011 to 2019 closed. See Note 16, “Subsequent Events” for information on contractual commitments as a result of this transaction.
15. iSegment Information
We are primarily engaged in underwriting property and casualty insurance. We have itwo
ongoing reporting segments: U.S. Operations and International Operations. Additionally, we have Run-off Lines for certain products that we no longer underwrite.
We consider many factors, including the nature of each segment’s insurance and reinsurance products, production sources, distribution strategies and the regulatory environment, in determining how to aggregate reporting segments.
In evaluating the operating performance of our segments, we focus on core underwriting and investing results before the consideration of realized gains or losses from investments. Realized investment gains are reported as a component of the Corporate and Other segment, as decisions regarding the acquisition and disposal of securities reside with the corporate investment function and are not under the control of the individual business segments. Identifiable assets by segment are those assets used
in the operation of each segment.
Revenue and income (loss) before income taxes for each segment were as follows:
For
the Three Months Ended September 30,
For the Nine Months Ended September 30,
(in millions)
2022
2021
2022
2021
Revenue:
Earned premiums
U.S.
Operations
$
i329.3
$
i323.5
$
i998.5
$
i952.4
International
Operations
i125.2
i163.9
i390.7
i471.1
Run-off
Lines
i0.5
i0.1
i0.7
i0.4
Total
earned premiums
i455.0
i487.5
i1,389.9
i1,423.9
Net
investment income
U.S. Operations
i23.1
i29.2
i68.7
i91.7
International
Operations
i10.3
i12.3
i30.4
i38.2
Run-off
Lines
i0.6
i0.9
i1.8
i2.8
Corporate
and Other
i—
i3.7
i—
i10.5
Total
net investment income
i34.0
i46.1
i100.9
i143.2
Net
investment and other gains (losses)
(i44.7)
(i5.3)
(i119.6)
i32.5
Total
revenue
$
i444.3
$
i528.3
$
i1,371.2
$
i1,599.6
For
the Three Months Ended September 30,
For the Nine Months Ended September 30,
(in millions)
2022
2021
2022
2021
Income (loss) before income taxes
U.S.
Operations
$
i26.6
$
i39.9
$
i113.5
$
i130.1
International
Operations
i3.3
i6.9
i28.6
i14.6
Run-off
Lines
i0.7
(i3.6)
(i1.9)
(i4.5)
Total
segment income before income taxes
i30.6
i43.2
i140.2
i140.2
Corporate
and Other
(i19.3)
(i11.0)
(i53.5)
(i30.2)
Net
investment and other gains (losses)
(i44.7)
(i5.3)
(i119.6)
i32.5
Foreign
currency exchange gains (losses)
i9.1
i1.3
i16.5
(i4.4)
Impairment
of goodwill
(i28.5)
i—
(i28.5)
i—
Total
income (loss) before income taxes
$
(i52.8)
$
i28.2
$
(i44.9)
$
i138.1
/i
The
table below presents earned premiums by geographic location for the three and nine months ended September 30, 2022 and 2021. For this disclosure, we determine geographic location by the country of domicile of our subsidiaries that underwrite the business and not by the location of insureds or reinsureds from whom the business was generated.
Included
in total assets at September 30, 2022 and December 31, 2021 are $i302.5 million and $i554.2
million, respectively, in assets associated with trade capital providers.
16. iSubsequent Events
Loss Portfolio Transfer - U.S.
On November 9, 2022, the U.S. Loss Portfolio Transaction with Enstar covering a majority of the
Company’s U.S. casualty insurance reserves, including construction, for accident years 2011 to 2019 closed.
The estimated subject reserves transferred to Enstar on the closing date were $i509.0 million, which represents the $i746.0 million
in loss reserves as of January 1, 2022, less estimated claims paid through October 31, 2022. On the closing date, the Company also transferred approximately $i630.0 million of cash and investments to Enstar for which a portion will be deposited into a Trust established
to secure Enstar’s claim payment obligation to the Company. The financial statement impact of this transaction, which will be recorded in the fourth quarter of 2022, is a $i509.0 million increase in Reinsurance recoverables, a reduction of $i630.0 million
in cash and investments, and an after-tax charge of approximately $i100.0 million.
Federal Securities Class Action
On October 20, 2022, a securities class action lawsuit was filed in the United States District Court for the Southern District of New York against the
Company and certain of its current and former officers, alleging securities fraud violations under sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiff alleges that from February 13, 2018 through August 9, 2022, Defendants made false and misleading statements concerning the Company’s reserves and underwriting standards. The Company is not able at this time to determine or predict the ultimate outcome of this proceeding or provide a reasonable estimate or range of estimates of the possible outcome or loss, if any, in this matter.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion and analysis of our results of operations for the three and nine months ended September 30, 2022 compared with the three and nine months ended September 30, 2021, and a discussion of our financial condition as of September 30, 2022. This discussion and analysis should be read in conjunction with the attached unaudited interim Condensed Consolidated Financial Statements and notes thereto and Argo Group’s 2021 Form 10-K, including the audited Consolidated Financial Statements and notes thereto.
Certain reclassifications have been made to financial information presented for prior years to conform to the current year’s presentation.
Forward-Looking
Statements
This report includes forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "expect,""intend,""plan,""believe,"“do not believe,”“aim,”"project,""anticipate,"“seek,”"will,"“likely,”“assume,”“estimate,”"may,"“continue,”“guidance,”“growth,”“objective,”“remain optimistic,”“improve,”“progress,”“path toward,”“outlook,”“trends,”“future,”“could,”“would,”“should,”“target,”“on track” and similar expressions of a future or forward-looking nature.
Such
statements are subject to certain risks and uncertainties that could cause actual events or results to differ materially including, but not limited to, recent changes in interest rates and inflation, the outcome of our exploration of strategic alternatives, the adequacy of our projected loss reserves, employee retention and changes in key personnel, the ability of our insurance subsidiaries to meet risk-
based capital and solvency requirements, the outcome of legal and regulatory proceedings, investigations, inquiries, claims and litigation and other risks
and uncertainties discussed in our filings with the SEC. For a more detailed discussion of such risks and uncertainties, see Part II, Item 1A. “Risk Factors” herein and Part I, Item 1A, “Risk Factors” in Argo Group’s Form 10-K and Form 10-K/A for the fiscal year ended December 31, 2021. The inclusion of a forward-looking statement herein should not be regarded as a representation by Argo Group that Argo Group's objectives will be achieved. Argo Group undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You should not place undue reliance on any such statements.
Consolidated Results of Operations
For
the three and nine months ended September 30, 2022, we reported a net loss attributable to common shareholders of $51.4 million ($1.47 per diluted common share) and $73.9 million ($2.11 per diluted common share), respectively.For the three and nine months ended September 30, 2021, we reported net income attributable to common shareholders of $19.8 million ($0.56 per diluted common share) and $114.1 million ($3.26 per diluted common share), respectively.
The following is a comparison of selected data from our operations, as well as book value per common share, for the relevant comparative periods:
For
the Three Months Ended September 30,
For the Nine Months Ended September 30,
(in millions)
2022
2021
2022
2021
Gross written premiums
$
750.9
$
875.6
$
2,203.6
$
2,447.4
Earned
premiums
$
455.0
$
487.5
$
1,389.9
$
1,423.9
Net investment income
34.0
46.1
100.9
143.2
Net
investment and other gains (losses):
Net realized investment and other gains (losses)
(42.3)
0.6
(119.2)
3.3
Change in fair value recognized
(1.1)
(5.1)
2.5
30.7
Change
in allowance for credit losses on fixed maturity securities
(1.3)
(0.8)
(2.9)
(1.5)
Total net investment and other gains (losses)
(44.7)
(5.3)
(119.6)
32.5
Total
revenue
$
444.3
$
528.3
$
1,371.2
$
1,599.6
Income (loss) before income taxes
$
(52.8)
$
28.2
$
(44.9)
$
138.1
Income
tax provision (benefit)
(4.0)
5.8
21.1
16.1
Net income (loss)
$
(48.8)
$
22.4
$
(66.0)
$
122.0
Less:
Dividends on preferred shares
2.6
2.6
7.9
7.9
Net income (loss) attributable to common shareholders
$
(51.4)
$
19.8
$
(73.9)
$
114.1
GAAP
Ratios:
Loss ratio
65.7
%
64.0
%
61.8
%
62.5
%
Expense ratio
35.4
%
36.3
%
35.6
%
37.3
%
Combined
ratio
101.1
%
100.3
%
97.4
%
99.8
%
The table above includes ratios in accordance with U.S. generally accepted accounting principles (“GAAP”) that we use to measure our profitability. We believe that they enhance an investor’s understanding of our profitability. They are calculated as follows:
a.Loss ratio:
the ratio of claims and claims expense to premiums earned. Loss ratios include the impact of catastrophe losses.
b.Expense ratio: the ratio of underwriting, acquisition and insurance expense to premiums earned.
c.Combined ratio: the sum of the loss ratio and the expense ratio. The difference between 100% and the combined ratio represents underwriting income (loss) as a percentage of premiums earned, or underwriting margin.
On
April 28, 2022, we announced that our Board of Directors initiated an exploration of strategic alternatives and will consider a wide range of options for the Company, including, among other things, a potential sale, merger or other strategic transaction. There can be no assurance that this process will result in the Company pursuing a particular transaction or other strategic outcome. The Company has not set a timetable for completion of this process, and it does not intend to disclose further developments unless and until it determines that further disclosure is appropriate or necessary.
Impact
of COVID-19
Beginning in March 2020 and continuing throughout 2021 and year to date 2022, the global COVID-19 pandemic, including the arrival of new strains of the virus, has resulted in significant disruptions in economic activity and financial markets. While the Company’s consolidated net investment income benefited from the gradual improvement of economic conditions as the impact of the pandemic lessened during 2021, COVID-19 has directly and indirectly adversely affected the Company and may continue to do so for an uncertain period of time. The Company did not incur any COVID-19 catastrophe losses during the three and nine months ended September 30,
2022, as compared to $3.0 million and $12.0 million for the three and nine months ended September 30, 2021. Our liquidity and capital resources were not materially impacted by COVID-19 and related economic conditions during the nine months ended September 30, 2022 or 2021. Although vaccines are now available, the extent to which COVID-19 (including emerging new strains of the COVID-19 virus) will continue to impact our business will depend on future developments that cannot be predicted, and while we have recorded our best estimates of this impact as of and for the three and nine months ended September 30, 2022, actual results in future periods could materially differ from those disclosed herein.
Non-GAAP
Measures
In the following discussion and analysis of our results of operations, we have included certain non-generally accepted accounting principles ("non-GAAP") financial measures. We believe that these non-GAAP measures, specifically current accident year non-catastrophe losses, current accident year non-catastrophe loss ratio and current accident year non-catastrophe combined ratios, which may be defined differently by other companies, explain our results of operations in a manner that allows for an understanding of the underlying trends in our business. However, these measures should not be viewed as a substitute for those determined in accordance with GAAP. Reconciliations of these financial measures to their most directly comparable GAAP measures are included in the tables below.
Favorable
(unfavorable) prior accident year loss development
(31.6)
(2.3)
%
(6.0)
(0.4)
%
Catastrophe losses, including COVID-19
(34.6)
(2.5)
%
(85.9)
(6.0)
%
Current
accident year non-catastrophe losses (non-GAAP)
$
792.2
57.0
%
$
799.0
56.1
%
Expense ratio
35.6
%
37.3
%
Current
accident year non-catastrophe combined ratio (non-GAAP)
92.6
%
93.4
%
Current accident year non-catastrophe losses, current accident year non-catastrophe loss ratio and current accident year non-catastrophe combined ratio are internal performance measures used by the Company to evaluate its underwriting activity by excluding catastrophe losses and the impact of changes to prior year loss reserves. Management
believes that these non-GAAP metrics measure performance in a way that is useful to investors as it removes the impact of volatile and unpredictable catastrophe losses and prior accident year reserve development.
Gross Written and Net Earned Premiums
Consolidated gross written and net earned premiums by our four primary insurance lines were as follows:
Gross
written premiums decreased $124.7 million, or 14.2%, for the three months ended September 30, 2022, as compared to the same period ended 2021, while decreasing $243.8 million, or 10.0%, for the nine months ended September 30, 2022 as compared to the same period ended 2021. The decrease in gross written premiums is primarily attributable to the sale of Argo Seguros as well as businesses we are exiting, including contract binding and excess and surplus (“E&S”) property businesses in the U.S., London direct and facultative and North American binder business in our International Operations. Underwriting actions executed on certain delegated authority programs further contributed to the decrease. Both U.S. Operations and International Operations continued to see overall rate
increases (single to low double digits) during 2021 and 2022.
Consolidated net earned premiums for the three and nine months ended September 30, 2022 decreased $32.5 million, or 6.7%, and $34.0 million, or 2.4%, respectively, as compared to the same periods ended 2021. The decrease in both periods is primarily driven by the sale of Argo Seguros and the exiting of certain business lines in our European operations, partially offset by an increase in our U.S. Operations across multiple business lines. The main drivers of growth in our U.S. operations
are primarily driven by higher premium retention, and additional growth from in-land marine, surety, and casualty.
Our gross written and net earned premiums are further discussed by reporting segment and major lines of business below under the heading “Segment Results.”
Net Investment Income
Consolidated net investment income for the three and nine months ended September 30, 2022 was $34.0 million and $100.9 million, respectively, compared to $46.1 million and $143.2 million for the same periods in 2021. Consolidated net investment income decreased $42.3 million, or 29.5%, for the nine months ended September 30,
2022 as compared to the nine months ended September 30, 2021. The decrease in net investment income was driven by a decrease in income from our alternative investment portfolio which includes earnings from both private equity and hedge fund investments. Our alternative investment portfolio, which is reported on a one to three-month lag, produced net investment income for the three and nine months ended September 30, 2022 of $3.2 million and $20.9 million, compared to $24.2 million and $74.8 million for the same period ended September 30, 2021, primarily from lower returns on hedge funds and private equity investments.
Net investment income from fixed maturity assets and dividends from equity securities was $30.8 million and $80.0 million for the three and nine months ended
September 30, 2022, compared to $21.9 million and $68.4 million for the same periods ended 2021, primarily due to an increase in fixed maturity securities.
Net Investment and Other Gains and Losses
Consolidated net investment and other gains and losses decreased $39.4 million and $152.1 million for the three and nine months ended September 30, 2022, respectively, as compared to the three and nine months ended September 30, 2021. Consolidated net investment and other losses of $119.6 million for the nine months ended September 30, 2022 were primarily driven from
the sale of Argo Seguros and AGSE, and the impairment of investments related to the U.S. loss portfolio transfer. The losses related to the sale of Argo Seguros and AGSE included $31.8 million of historical foreign currency translation losses which were previously recognized in accumulated other comprehensive income, resulting in no impact to total shareholders’ equity from this reclassification. For the losses recognized in relation to the U.S. loss portfolio transfer, the Company impaired certain investments that will be transferred at fair value to a third party at the close of the transaction. These realized losses were previously recognized in accumulated other comprehensive income, resulting in no impact to total shareholders’ equity from this reclassification. The remainder of the change is primarily driven from increased net realized losses on foreign currency forward contracts
in 2022 as compared to 2021.
Consolidated losses and loss adjustment expenses decreased $12.9 million, or 4.1%, and decreased $32.5 million, or 3.6%, for the three and nine months ended September 30, 2022, respectively, as compared to the three and nine months ended September 30, 2021. The consolidated loss ratio for the three months ended September 30,
2022 was 65.7%, 1.7 percentage points higher than 64.0% for the same period in 2021, driven by higher net unfavorable prior-year reserve development in 2022 as compared to 2021 (1.3 percentage point increase) and a higher current accident year non-catastrophe loss ratio (0.9 percentage point increase), partially offset by lower catastrophe losses including losses related to COVID-19 (0.5 percentage point decrease). Catastrophe losses for the three months ended September 30, 2022 of $23.4 million were attributable to losses associated with Hurricane Ian. The consolidated loss ratio for the nine months ended September 30, 2022 was 61.8%, 0.7 percentage points lower than 62.5% for the same period in 2021, driven by lower catastrophe losses including losses related to COVID-19 (3.5 percentage point decrease), partially offset by higher net unfavorable prior-year reserve
development in 2022 as compared to 2021 (1.9 percentage points) and a higher current accident year non-catastrophe loss ratio (0.9 percentage point increase). Catastrophe losses for the nine months ended September 30, 2022 of $34.6 million are primarily attributable to Hurricane Ian, losses associated with the Ukraine-Russia conflict and other weather related losses in the U.S.
The net unfavorable prior-year reserve development for the three months ended September 30, 2022 of $11.9 million was due to $16.2 million from U.S. Operations and $0.1 million in Run-off lines partially offset by favorable development of $4.4 million in International Operations. The net unfavorable prior-year reserve development for the nine months ended September 30, 2022 of $31.6 million was due to
$27.9 million from U.S. Operations, $0.8 million from International Operations and $2.9 million in Run-off lines. Our losses and loss adjustment expenses, including the prior-year loss reserve development shown in the following table, are further discussed by reporting segment under the heading “Segment Results” below. The following table summarizes the above referenced prior-year loss reserve development for the nine months ended September 30, 2022 with respect to net loss reserves by line of business as of December 31, 2021.
(in
millions)
Net Reserves 2021
Net Reserve Development (Favorable)/ Unfavorable
Percent of 2021 Net Reserves
Property
$
189.5
$
3.4
1.8
%
Liability
2,178.7
19.1
0.9
%
Professional
475.6
20.3
4.3
%
Specialty
279.4
(11.2)
(4.0)
%
Total
$
3,123.2
$
31.6
1.0
%
In
determining appropriate reserve levels for the nine months ended September 30, 2022, we maintained the same general processes and disciplines that were used to set reserves at prior reporting dates. No significant changes in methodologies were made to estimate the reserves since the last reporting date; however, at each reporting date we reassess the actuarial estimate of the reserve for loss and loss adjustment expenses and record our best estimate. Consistent with prior reserve valuations, as claims data becomes more mature for prior accident years, actuarial estimates were refined to weigh certain actuarial methods more heavily in order to respond to any emerging trends in the paid and reported loss data. Pricing, reinsurance costs, legal environment, general economic conditions including changes in inflation and many other factors impact our ultimate loss estimates. Refer to segment results for specific factors impacting
our current accident year loss ratios.
Consolidated gross reserves for losses and loss adjustment expenses were $5,731.4 million (including $95.4 million of reserves attributable to our Syndicate 1200 and 1910 trade capital providers) and $5,595.0 million (including $134.6 million of reserves attributable to our Syndicate 1200 and 1910 trade capital providers) as of September 30, 2022 and December 31, 2021, respectively. Our management has recorded its best estimate of loss reserves at each date based on current known facts and circumstances. Due to the significant uncertainties inherent in the estimation of loss reserves, it is possible that future loss development, favorable or unfavorable, may occur.
Consolidated underwriting, acquisition and insurance expense for the three and nine months ended September 30, 2022 decreased $16.1 million, or 9.1% and $35.9 million, or 6.8%, respectively, as compared to the same periods ended 2021. The consolidated expense ratio was 35.6% in the third quarter of 2022 compared to 37.3% for the nine months ended September 30, 2021. The expense ratio improved by 2.1% in U.S. Operations. The acquisition expense ratio was 17.1% and general and administrative expense ratio was 18.5% in the third
quarter of 2022 as compared to 17.2% and 20.1%, respectively, for the nine months ended September 30, 2021. The improvement in the general and administrative expense ratio reflects continued execution of our expense reduction initiatives, primarily driven by a $29.2 million decrease in general and administrative expenses for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.
Our underwriting, acquisition and insurance expenses are further discussed below by reporting segment under the heading “Segment
Results.”
Non-Operating Expenses
Non-operating expenses represent costs not associated with our ongoing insurance or other operations, including severance expenses, certain legal costs, merger and acquisition and other transaction-related expenses, and certain non-recurring expenses. As such, non-operating expenses have been excluded from the calculation of our expense ratio.
Non-operating expenses increased $2.8 million, or 34.1%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Non-operating expenses increased $13.0 million, or 62.2%, for the nine months ended
September 30, 2022 as compared to the nine months ended September 30, 2021. The expenses incurred for the nine months ended September 30, 2022 primarily relate to advisory fees, severance expenses and retention bonuses, and legal settlements.
These non-recurring costs are included in the line item Non-operating expenses in the Company’s Condensed Consolidated Statements of Income (Loss), and have been excluded from the calculation of our expense ratio.
Interest Expense
Consolidated
interest expense increased $1.3 million, or 23.6%, to $6.8 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Consolidated interest expense increased $2.4 million, or 14.7%, to $18.7 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The year-over-year increase was primarily attributable to higher short-term interest rates in 2022.
Foreign Currency Exchange Gains/Losses
Consolidated foreign currency exchange gains increased $7.8 million for the three months ended September 30, 2022, as compared to the three months ended
September 30, 2021. Consolidated foreign currency exchange gains increased $20.9 million for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021.The changes in the foreign currency exchange gains were due to fluctuations of the U.S. Dollar, on a weighted average basis, against the Canadian Dollar, Euro and the British Pound.
Impairment of Goodwill and Intangible Assets
As a result of the announced sale of Argo Underwriting Agency Limited and its Lloyd’s Syndicate 1200, an estimated fair value was established for Syndicate 1200 that was below its carrying value. As such, we recorded a $28.5 million impairment charge in the third quarter, consisting
of $17.3 million of indefinite lived intangible assets and $11.2 million of goodwill.
Income Tax Provision
The consolidated income tax provision represents the income tax expense or benefit associated with our operations based on the tax laws of the jurisdictions in which we operate. Therefore, the consolidated provision for income taxes represents taxes on net income for our Brazil, Ireland, Italy, Malta, Switzerland, United Kingdom, and U.S. operations. The Company recorded a consolidated income tax benefit of $4.0 million and income tax provision of $21.1 million for the three and nine months ended September 30, 2022. This
is compared to the consolidated income tax provision of $5.8 million and $16.1 million for the same periods ended 2021.
The consolidated effective tax rate was 7.6% and (47.0)% for the three and nine months ended September 30, 2022 compared to the consolidated effective tax rate of 20.6% and 11.7% for the same period ended 2021. The primary drivers for the fluctuation in the effective tax rate resulted from the sale of our Brazil operations in February 2022 and Malta operations in September 2022. The Brazil realized foreign exchange loss was excluded from tax calculations, and the tax benefits
related to the capital loss in Ireland were offset by a valuation allowance. Separately, the Malta capital loss reported in Bermuda received no tax benefit. Additionally, an impairment charge related to U.K. goodwill and intangible assets was recorded which received no tax benefit in the three month period ending September 30, 2022. Excluding the sale of Brazil and Malta, as well as the goodwill and intangibles impairment, the effective tax rate for the period ending September 30, 2022 was more aligned with statutory tax rates.
Segment Results
We are primarily engaged in writing property and casualty insurance. We have two ongoing reporting segments:
U.S. Operations and International Operations. Additionally, we have Run-off Lines for products that we no longer underwrite.
We consider many factors, including the nature of each segment’s insurance products, production sources, distribution strategies and regulatory environment, in determining how to aggregate reporting segments.
Our reportable segments include four primary insurance services and offerings as follows:
•Property includes both property insurance and reinsurance products. Insurance products cover commercial properties primarily in North America with some international covers. Reinsurance covers underlying exposures located throughout the world, including the United States. These offerings include coverages for man-made and natural disasters.
•Liability
includes a broad range of primary and excess casualty products primarily underwritten as insurance and, to a lesser extent reinsurance, for risks on both an admitted and non-admitted basis in the United States. Internationally, Argo Group underwrites non-U.S. casualty risks primarily exposed in the United Kingdom, Canada and Australia.
•Professional includes various professional lines products including errors and omissions and management liability coverages (including directors and officers).
•Specialty includes niche insurance coverages such as marine and energy, accident and health and surety product offerings.
In evaluating the operating performance of our segments, we focus on core underwriting and investing results before consideration
of realized gains or losses from the sales of investments. Realized investment gains and losses are reported as a component of the Corporate and Other segment, as decisions regarding the acquisition and disposal of securities reside with the corporate investment function and are not under the control of the individual business segments.
Since we generally manage and monitor the investment portfolio on an aggregate basis, the overall performance of the investment portfolio, and related net investment income, is discussed above on a combined basis under consolidated net investment income rather than within or by segment.
The following table summarizes the results of operations for U.S. Operations:
For the Three Months Ended September 30,
For
the Nine Months Ended September 30,
(in millions)
2022
2021
2022
2021
Gross written premiums
$
500.4
$
562.5
$
1,476.7
$
1,564.9
Earned
premiums
$
329.3
$
323.5
$
998.5
$
952.4
Losses and loss adjustment expenses
217.0
203.9
625.7
583.1
Underwriting,
acquisition and insurance expenses
103.0
104.7
312.8
318.2
Underwriting income
9.3
14.9
60.0
51.1
Net investment
income
23.1
29.2
68.7
91.7
Interest expense
4.7
3.5
12.8
10.6
Fee and other expense (income), net
(0.1)
0.1
—
0.6
Non-operating
expenses
1.2
0.6
2.4
1.5
Income before income taxes
$
26.6
$
39.9
$
113.5
$
130.1
GAAP
Ratios:
Loss ratio
65.9
%
63.0
%
62.7
%
61.2
%
Expense ratio
31.3
%
32.4
%
31.3
%
33.4
%
Combined
ratio
97.2
%
95.4
%
94.0
%
94.6
%
The table above includes underwriting income (loss) which is an internal performance measure that we use to measure our insurance profitability. We believe underwriting income (loss) enhances an investor’s understanding of insurance operations profitability. Underwriting income (loss) is calculated as earned premiums less losses and loss adjustment expenses less underwriting, acquisition
and insurance expense. Although underwriting income (loss) does not replace net income (loss) computed in accordance with GAAP as a measure of profitability, management uses underwriting income (loss) to focus our reporting segments on generating operating income.
The following table contains a reconciliation of certain non-GAAP financial measures, specifically the current accident year non-catastrophe losses, current accident year non-catastrophe loss ratio and current accident year non-catastrophe combined ratio, to their most directly comparable GAAP measures for our U.S. Operations.
Gross
written premiums for property decreased $15.9 million, or 21.6%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Gross written premiums for property decreased $43.7 million, or 21.5%, for the nine months ended September 30, 2022 as compared to the Nine months ended September 30, 2021. The decreases were driven from the sale of our contract binding and excess and surplus (“E&S”) property business units. This was partially offset by growth from the garage, inland marine and fronting business units. The decrease in net earned premium for the three and nine ended September 30,
2022 compared to the same period in 2021 were also due to the sale of the business units, noted above, offset by growth in the inland marine and garage business units.
Gross written premiums for liability decreased $18.2 million, or 5.9%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Gross written premiums for liability decreased $4.6 million, or 0.5%, for the nine months ended September
30, 2022 as compared to the nine months ended September 30, 2021.The decreases were primarily driven by the sale of the contract binding business unit and reduced production in general liability lines and public entity classes. This was partially offset by increases from business units that write environmental, garage and workers compensation lines. Net earned premium increased for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 as a result of the favorable production results from prior quarters in general liability, environmental, garage and workers compensation lines partially offset by reductions from the contract
binding business unit and the grocery and retail business unit which were put into run off in the fourth quarter of 2020.
Professional
Gross written premiums for professional decreased $32.1 million, or 24.7%, and for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Gross written premiums for professional decreased $53.3 million, or 14.7%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The decrease was driven by underwriting actions taken with the delegated authority programs and a softer management liability market. The decrease in net earned premium for the three months ended months
ended September 30, 2022, compared to the same period in 2021 was primarily a result of the reduced production in delegated authority programs, as noted above, during the year. Net earned premiums for the nine months ended September 30, 2022 compared to the same period in 2021 increased as the favorable production results from past quarters in management liability are still earning out and offsetting adverse impacts from the underwriting changes to delegated authority programs and certain errors and omissions lines.
Specialty
Gross written premiums increased $4.1 million or 7.8%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.
Gross written premiums increased $13.4 million or 8.3%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The growth in gross written premium for the three and nine months ended September 30, 2022, as compared to the same period in 2021, primarily came from surety and fronted marine lines. The growth in net earned premiums for the three and nine months ended September 30, 2022, respectively, compared to the same period in 2021 was also largely due to surety lines.
Loss and Loss Adjustment Expenses
Loss and loss adjustment expenses were $217.0 million and $203.9 million for the three months ended September
30, 2022 and 2021, respectively, and $625.7 million and $583.1 million for the nine months ended September 30, 2022 and 2021, respectively. The loss ratios for the three months ended September 30, 2022 and 2021 were 65.9% and 63.0%, respectively. The higher loss ratio in the three months ended September 30, 2022 was driven by higher net unfavorable prior-year reserve development in 2022 versus 2021 (4.8 percentage point increase), partially offset by a decrease in catastrophe losses (1.8 percentage point decrease). The current accident year non-catastrophe loss ratio for the three months ended September 30, 2022 was not
significantly different from the three months ended September 30, 2021. The loss ratios for the nine months ended September 30, 2022 and 2021 were 62.7% and 61.2%, respectively. The higher loss ratio in the first nine months of 2022 was driven by unfavorable prior-year reserve development in 2022 versus net favorable prior-year reserve development in 2021 (2.9 percentage point increase) and an increase in the current accident year non-catastrophe loss ratio (1.2 percentage point increase), partially offset by a decrease in catastrophe losses (2.6 percentage point decrease).
The current accident year non-catastrophe loss ratios for the three and nine months ended September 30, 2022 were 59.7% and 59.0%, respectively, compared
to 59.8% and 57.8% for the three and nine months ended September 30, 2021, respectively. The current accident year non-catastrophe loss ratio for the three months ended September 30, 2022 was impacted by increased inflation, while the current accident year non-catastrophe loss ratio for the three months ended September 30, 2021 was impacted by an increase to the loss ratio for liability lines. The current accident year non-catastrophe loss ratio for the nine months ended September 30, 2022 was impacted by increased inflation and higher claims frequency due to the recovering economy.
Net unfavorable prior-year reserve development for the three and nine months ended September 30, 2022 was $16.2
million and $27.9 million, respectively. The net unfavorable prior year reserve development for the three and nine months ended September 30, 2022 primarily related to liability and property lines, including the impact of large losses, partially offset by favorable development in specialty lines. The unfavorable prior year development was largely driven by businesses we have exited, and relates to accident years 2019 and prior partially offset by favorable prior year development on accident years 2020 and 2021.
Net prior-year reserve development for the three and nine months ended September 30,
2021 was $0.2 million unfavorable and $0.7 million favorable. The unfavorable prior-year reserve development for the three months ended September 30, 2021 was due to liability lines. The favorable prior-year reserve development for the nine months ended September 30, 2021 primarily related to favorable development in specialty lines, partially offset by unfavorable development in liability and property lines.
Catastrophe losses for the three and nine months ended September 30, 2022 were $4.2 million and $9.2 million, respectively, compared to $10.0 million and $32.9 million for the three and nine months ended September 30, 2021, respectively. Catastrophe losses for the three months ended September 30,
2022 were due to Hurricane Ian. Catastrophe losses for the nine months ended September 30, 2022 were driven by Hurricane Ian and U.S. storms. Catastrophe losses for the three months ended September 30, 2021 were driven by Hurricane Ida and other U.S. storms. Catastrophe losses for the nine months ended September 30, 2021 were driven by Winter Storm Uri, Hurricane Ida and other U.S. storms.
Underwriting, Acquisition and Insurance Expenses
Underwriting, acquisition and insurance expenses were $103.0 million and $312.8 million for the three and nine months ended September 30, 2022, respectively, as compared to $104.7 million and $318.2 million for the three and nine months ended September 30,
2021, respectively. The expense ratio decreased to 31.3% for the three months ended September 30, 2022 from 32.4% for the same period 2021. The expense ratio decreased to 31.3% for the nine months ended September 30, 2022 as compared to 33.4% for the same period 2021. The ratio improvements were primarily driven by reductions in general and administrative expenses and earned premium growth.
International Operations
The following table summarizes the results of operations for International Operations:
The following table contains a reconciliation of certain non-GAAP financial measures, specifically
the current accident year non-catastrophe losses, current accident year non-catastrophe loss ratio and current accident year non-catastrophe combined ratio, to their most directly comparable GAAP measures for our International Operations.
Gross
written premiums for property decreased $31.2 million, or 35.7%, and $78.7 million, or 31.8%, for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021. The decrease in gross written premiums was primarily due to a reduction in business produced by Syndicate 1200 following our exit from certain property lines of business and other international platforms where we have stopped writing business. Net earned premiums for property decreased $16.5 million and $44.2 million for the three and nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021 driven by the aforementioned reasons.
Liability
Gross written
premiums for liability decreased $5.6 million, or 8.1%, and $21.1 million, or 11.0%, for the three and nine months ended September 30, 2022, respectively, as compared to the same period in 2021. The reduction in gross written premiums was primarily due to lower premiums from our European operations where we have stopped writing business along with the sales of Argo Seguros and AGSE. Net earned premiums decreased for the three and nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021 driven by the aforementioned reasons.
Professional
Gross written premiums for professional lines decreased $7.8 million, or 12.5%, and $11.5 million, or 6.8%, for the
three and nine months ended September 30, 2022 as compared to the same period in 2021. The decrease in gross written premiums was driven by the sale of Argo Seguros and was partially offset by higher premiums in Syndicate 1200 arising from growth within professional indemnity and transactional liability lines of business.. The decrease in net earned premiums for the three and nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021 was also mainly due to the sale of Argo Seguros.
Specialty
Gross written premiums decreased $18.2 million, or 19.4%, and $44.3 million, or 16.2%, for the three and nine months ended September
30, 2022 as compared to the same period in 2021. The decrease in gross written premiums was primarily driven by the sales of Argo Seguros and Ariel Re and was partially offset by growth in Syndicate 1200 primarily from strong business activity written in Terror & Political Violence. The decrease in net earned premiums for the three and nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021 was driven by the aforementioned reasons.
Loss
and loss adjustment expenses were $81.7 million and $229.8 million for the three and nine months ended September 30, 2022, respectively. Loss and loss adjustment expenses were $103.8 million and $301.2 million for the three and nine months ended September 30, 2021. The loss ratio for the three months ended September 30, 2022 was 65.3% compared to 63.3% for the three months ended September 30, 2021. The increase in the loss ratio was driven by an increase in catastrophe losses (4.8 percentage point increase) and an increase in the current accident year non-catastrophe loss ratio (1.9 percentage point increase), partially offset by net favorable prior year reserve development in 2022 versus net unfavorable prior-year reserve development in 2021 (4.7 percentage point decrease).
The loss ratio for the nine months ended September 30, 2022 was 58.8% compared to 63.9% for the nine months ended September 30, 2021. The decrease in the loss ratio was driven by a decrease in catastrophe losses (4.7 percentage point decrease) and a decrease in the current accident year non-catastrophe loss ratio (0.6 percentage point decrease), partially offset by net unfavorable prior-year reserve development in 2022 versus prior-year development in 2021 (0.2 percentage point increase).
The current accident year non-catastrophe loss ratios for the three and nine month ended September 30, 2022 were 53.5% and 52.1%, respectively, compared to 51.6% and 52.7% for the three and nine months ended September 30, 2021. The increase in
the loss ratio for the three months ended September 30, 2022 primarily related to the impact of ceded reinstatement premiums on net earned premium. The improvement in the loss ratio for the nine months ended September 30, 2022 primarily related to the results of re-underwriting actions across multiple divisions in Syndicate 1200. The current accident year non-catastrophe loss ratio also benefited from rate increases earning through premiums.
Net prior-year reserve development was $4.4 million favorable and $0.8 million unfavorable for the three and nine months ended September 30, 2022, respectively. The net favorable prior-year reserve development for the three months ended September 30, 2022 primarily related to favorable development
in property and liability lines in Syndicate 1200 partially offset by unfavorable development in Argo Insurance Bermuda driven by reassessments of potential losses associated with professional liability claims. The net unfavorable prior-year reserve development for the nine months ended September 30, 2022 primarily related to unfavorable movements in professional liability losses in Argo Insurance Bermuda partially offset by favorable development in Syndicate 1200 property and liability lines. Net favorable prior-year reserve development was $2.0 million and $0.1 million both the three and nine months ended September 30, 2021, respectively. The net unfavorable development for the three months ended September 30, 2021 primarily related to $7.2 million in unfavorable development due to a one-time accounting adjustment, partially
offset by favorable liability experience in Syndicate 1200. The net unfavorable development for the nine months ended September 30, 2021 primarily related to unfavorable development due to the one-time accounting adjustment and large claim movements at Argo Insurance Bermuda, partially offset by favorable development in property lines, including losses associated with prior year catastrophe losses.
Catastrophe losses were $19.2 million and $25.4 million for the three and nine months ended September 30, 2022, respectively, compared to $17.3 million and $53.0 million for the three and nine months ended September 30, 2021. For the three months ended September 30, 2022, catastrophe losses all related to Syndicate 1200 and were due
to Hurricane Ian. Catastrophe losses for the nine months ended September 30, 2022 were due to Hurricane Ian and the Ukraine-Russia conflict. Catastrophe losses for the three and nine months ended September 30, 2021 were driven by Winter Storm Uri, Hurricane Ida and COVID-19. Catastrophe losses for the three and nine months ended September 30, 2021 included $3.0 million and $12.0 million, respectively, associated with COVID-19, primarily resulting from contingency exposures.
Underwriting, Acquisition and Insurance Expenses
Underwriting, acquisition and insurance expenses were $47.0 million and $155.3 million for the three and nine months ended September 30, 2022, respectively, as compared
to $64.7 million and $188.8 million for the three and nine months ended September 30, 2021, respectively. The expense ratio decreased to 37.5% for the three months ended September 30, 2022 from 39.5% for the same period 2021. The acquisition expense decrease is driven by expenses incurred on business lines we have exited. The expense ratio for the nine months ended September 30, 2022 decreased to 39.8%, which is broadly consistent with the same period in 2021.
Fee and Other Income/Expense
Fee and other income/expense represent amounts we receive, and costs we incur, in connection with the management of third-party capital for our underwriting Syndicates at Lloyd’s. Fee and other expense was $0.2 million, fee and other income was $1.8
million for the three and nine months ended September 30, 2022, respectively, as compared to $1.0 million and $1.5 million of expense for the same periods in 2021.
The following table summarizes the results of operations for Run-off Lines:
For
the Three Months Ended September 30,
For the Nine Months Ended September 30,
(in millions)
2022
2021
2022
2021
Earned premiums
$
0.5
$
0.1
$
0.7
$
0.4
Losses
and loss adjustment expenses
0.1
4.0
2.9
6.6
Underwriting, acquisition and insurance expenses
0.3
0.5
1.3
0.8
Underwriting
income (loss)
0.1
(4.4)
(3.5)
(7.0)
Net investment income
0.6
0.9
1.8
2.8
Interest
expense
—
0.1
0.2
0.3
Non-operating expenses
—
—
—
—
(Loss)
income before income taxes
$
0.7
$
(3.6)
$
(1.9)
$
(4.5)
Run-off Lines include liabilities associated with other liability policies that were issued in the 1960s, 1970s and into the 1980s, as well as the former risk-management business and other business no longer underwritten. Through our subsidiary Argonaut Insurance Company (“Argonaut”), we are exposed to asbestos liability
at the primary level through claims filed against our direct insureds, as well as through its position as a reinsurer of other primary carriers. Argonaut has direct liability arising primarily from policies issued from the 1960s to the early 1980s, which pre-dated policy contract wording that excluded asbestos exposure. The majority of the direct policies were issued on behalf of small contractors or construction companies. We believe that the frequency and severity of asbestos claims for such insureds is typically less than that experienced for large, industrial manufacturing and distribution concerns.
Argonaut also assumed risk as a reinsurer, primarily for the period from 1970 to 1975, a portion of which was assumed from the London market. Argonaut also reinsured risks on policies written by domestic carriers. Such reinsurance typically
provided coverage for limits attaching at a relatively high level, which are payable only after other layers of reinsurance are exhausted. Some of the claims now being filed on policies reinsured by Argonaut are on behalf of claimants who may have been exposed at some time to asbestos incorporated into buildings they occupied, but have no apparent medical problems resulting from such exposure. Additionally, lawsuits are being brought against businesses that were not directly involved in the manufacture or installation of materials containing asbestos. We believe that a significant portion of claims generated out of this population of claimants may result in incurred losses generally lower than the asbestos claims filed over the past decade and could be below the attachment level of Argonaut.
The following table represents a roll forward of total gross and net reserves for the asbestos and environmental exposures in our Run-off Lines, along with the ending balances of all other reserves within Run-off Lines. Amounts in the net column are reduced by reinsurance recoverables.
Loss reserves - asbestos and environmental, end of period
58.0
50.6
52.6
45.1
Risk-management
reserves
156.6
95.5
165.6
103.2
Run-off reinsurance reserves
0.4
0.4
—
—
Other
run-off lines
29.9
22.8
12.3
7.3
Total loss reserves - Run-off Lines
$
244.9
$
169.3
$
230.5
$
155.6
Losses
and loss adjustment expenses for the nine months ended September 30, 2022, were primarily the result of unfavorable loss reserve development in other run-off lines. Losses and loss adjustment expenses for the three months ended September 30, 2021 were the result of unfavorable loss reserve development on prior accident years in risk management workers compensation and an individual environment loss. Losses and loss adjustment expenses for the nine months ended September 30, 2021 were the result of unfavorable loss reserve development on prior accident years in risk management workers compensation, other run-off lines and an individual environmental loss.
Underwriting, Acquisition and Insurance Expenses
Underwriting, acquisition and
insurance expenses for the Run-off Lines increased for the nine months ended September 30, 2022 as compared to the same period in 2021 primarily as a result of an increase in the allowance for estimated uncollectible reinsurance.
The Company’s future cash flows
largely depend on the availability of dividends or other statutorily permissible payments from subsidiaries. The ability to pay such dividends is limited by the applicable laws and regulations of the various countries and states in which these subsidiaries operate, including, among others, Bermuda.
The primary sources of our cash inflows are premiums, reinsurance recoveries, proceeds from sales and redemptions of investments and investment income. The primary cash outflows are claim payments, loss adjustment expenses, reinsurance costs, underwriting, acquisition and overhead expenses, purchases of investments, payment of common and preferred dividends and income taxes. Management believes that cash inflows are sufficient to cover cash outflows
in the foreseeable future. We have access to additional sources of liquidity should the need for additional cash arise.
Our liquidity and capital resources were not materially impacted by COVID-19 and related economic conditions during 2021 and we do not anticipate that the pandemic will have a material impact on our liquidity and capital resources in the next twelve months based on current assumptions. However, there can be no assurance that the pandemic will not cause further disruption to our business or the global economy in that time period.
Cash provided by operating activities can fluctuate due to timing differences in the collection of premiums and reinsurance recoveries and the payment of losses and expenses. For the nine months ended September 30, 2022 and 2021, cash provided
by operating activities was $99.5 million compared to cash provided by operating activities of $40.8 million, respectively. The increase in cash flows provided by operating activities in 2022 compared to 2021 was attributable to various fluctuations within our operating activities, and primarily related to the timing of reinsurance payments and recoveries, claim payments and premium cash receipts in the respective periods.
For the nine months ended September 30, 2022 net cash used in investing activities was $106.1 million compared to net cash provided by investing activities of $50.6 million for the same period in 2021. Net cash used in investing activities was mainly the result of the change in proceeds from fixed maturities, purchases of commercial mortgage loans, and foreign regulatory pools. This was offset primarily by reduced purchases of fixed maturities. Additionally,
we received $13.9 million in net cash from the sale of Argo Seguros and AGSE.
For the nine months ended September 30, 2022 and 2021, net cash used in financing activities was $38.3 million and $39.4 million, respectively, driven by dividends to our common and preferred shareholders.
On November 9, 2022, the U.S. Loss Portfolio Transaction with Enstar covering a majority of the Company’s U.S. casualty insurance reserves, including construction, for accident years 2011 to 2019 closed. See Note 16, “Subsequent Events” for information on cash and investments transferred as a result of this transaction.
Revolving
Credit Facility and Term Loan
On November 2, 2018, each of Argo Group, Argo Group US, Inc., Argo International Holdings Limited, and Argo Underwriting Agency Limited (the “Borrowers”) entered into a $325 million credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement includes a one-time borrowing of $125 million for a term loan (the “Term Loan”), and a $200 million revolving credit facility. The Company used most of the net proceeds from the Preferred Stock Offering (as defined in Note 11, “Shareholders’ Equity” of Argo Group’s 2021 Form 10-K) to pay off the Term Loan in September 2020.
Borrowings under the Credit Agreement may be used for general corporate purposes,
including working capital and permitted acquisitions, and each of the Borrowers has agreed to be jointly and severally liable for the obligations of the other Borrowers under the Credit Agreement.
The Credit Agreement contains customary events of default. If an event of default occurs and is continuing, the Borrowers could be required to repay all amounts outstanding under the Credit Agreement. The lenders could also elect to accelerate the maturity of the loans and/or terminate the commitments under the Credit Agreement upon the occurrence and during the continuation of an event of default. No defaults or events of defaults have occurred as of the date of this filing.
On March 2, 2022, the parties to the Credit Agreement entered into Amendment No. 1 to the Credit Agreement, which replaced LIBOR with the Euro Interbank Offered Rate
(“EURIBOR”) and the Sterling Overnight Index Average (“SONIA”) as the interest rate benchmark for borrowings denominated in Euros and in Sterling, respectively. This amendment also sets forth provisions for fallback rates in the event that EURIBOR and SONIA are not available. The USD LIBOR benchmark interest rate was not replaced or affected by this amendment as USD LIBOR remains effective until June 2023.
On July 15, 2022, the parties to the Credit Agreement entered into Amendment No. 2, which revised the definition of “Tangible Net Worth.”
Preferred
Stock Dividends
On November 3, 2022, our Board of Directors declared a quarterly cash dividend in the amount of $437.50 per share on our Series A Preference Shares. Holders of Depositary Shares each representing a 1/1,000th interest in a share of Series A Preferred Stock will receive $0.43750 per Depositary Share. The dividend will be paid on December 15, 2022 to our shareholders of record on November 30, 2022.
Argo Group Common Shares and Dividends
On November 3, 2022, the Board declared a quarterly cash dividend in the amount of $0.31 on each share of common stock outstanding. The dividend will be paid on December
15, 2022 to our common shareholders of record on November 30, 2022.
On May 3, 2016, the Board authorized the repurchase of up to $150.0 million of our common shares (“2016 Repurchase Authorization”). The 2016 Repurchase Authorization supersedes all the previous repurchase authorizations. As of September 30, 2022, availability under the 2016 Repurchase Authorization for future repurchases of our common shares was $53.3 million.
Senior Notes
In September 2012, Argo Group International Holdings, Ltd. (the “Parent Guarantor”), through its subsidiary Argo Group U.S. (the “Subsidiary Issuer”), issued $143.8 million aggregate principal amount of the Subsidiary Issuer’s
6.5% Senior Notes due September 15, 2042 (the “Notes”). The Notes are unsecured and unsubordinated obligations of the Subsidiary Issuer and rank equally in right of payment with all of the Subsidiary Issuer’s other unsecured and unsubordinated debt. The Notes are guaranteed on a full and unconditional senior unsecured basis by the Parent Guarantor. The Notes may be redeemed, for cash, in whole or in part at the Subsidiary Issuer’s option, at any time and from time to time, prior to maturity at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued but unpaid interest on the principal amount being redeemed to, but not including, the redemption date.
Letter of Credit Facilities
On June 22, 2022, we posted collateral in a form of a $50.0 million
letter of credit under the terms of the Malta sales agreement. The letter of credit is subject to reimbursement by Argo in the event of a drawdown.
Condensed Consolidating Financial Information
In accordance with Article 10 of SEC Regulation S-X, we have elected to present condensed consolidating financial information in lieu of separate financial statements for the Subsidiary Issuer. The following tables present condensed consolidating financial information as of and for the nine months ended September 30, 2022, of the Parent Guarantor and the Subsidiary Issuer. The Subsidiary Issuer is an indirect wholly-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor under the equity method
for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor’s investment accounts and earnings.
The Parent Guarantor fully and unconditionally guarantees certain of the debt of the Subsidiary Issuer. Condensed consolidating financial information of the Subsidiary Issuer is presented on a consolidated basis and consists principally of the net assets and results of operations of operating insurance company subsidiaries.
Net
income (loss) attributable to common shareholders
$
(73.9)
$
64.7
$
(106.0)
$
41.3
$
(73.9)
(1)Includes all other subsidiaries of
Argo Group International Holdings, Ltd. and all intercompany eliminations.
(2)Includes all Argo Group International Holdings, Ltd. parent company eliminations.
Recent Accounting Standards and Critical Accounting Estimates
New Accounting Standards
The discussion of the adoption and pending adoption of recently issued accounting policies is included in Note 2, “Recently Issued Accounting Pronouncements,” in the Notes to the Consolidated Financial Statements, included in Part I, Item 1 - “Consolidated Financial Statements (unaudited).”
Critical Accounting Estimates
Refer
to “Critical Accounting Estimates” in the Company’s 2021 Form 10-K for information on accounting estimates and policies that we consider critical in preparing our 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.
There have been no material changes to our critical accounting estimates described in our 2021 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We believe that we are principally exposed to four types of market risk: interest rate risk, credit risk, equity price risk and foreign currency risk.
Interest Rate Risk
Our primary market risk exposure is the exposure of our fixed maturity investment portfolio to interest rate risk and the changes in interest rates. Fluctuations in interest rates have a direct impact on the fair value of these securities. As interest rates rise, the fair value of our fixed maturity portfolio falls and the converse is also true. We manage interest rate risk through an active portfolio management strategy that involves the selection of investments with appropriate characteristics such as duration, yield, currency and liquidity
that are tailored to the anticipated cash outflow characteristics of our liabilities. A significant portion of our investment portfolio matures each year, allowing for reinvestment at current market rates. The model duration of the assets comprising our fixed maturity investment portfolio was 2.86 years and 2.81 years at September 30, 2022 and December 31, 2021, respectively.
Credit Risk
We have exposure to credit risk on losses recoverable from reinsurers and receivables from insureds. Our controls to mitigate this risk include limiting our exposure to any one counterparty, evaluating the financial strength of our reinsurers, generally requiring minimum credit ratings and in certain cases receiving collateral from our reinsurers and insureds.
We
also have exposure to credit risk in our investment holdings. Our risk management strategy and investment policy attempts to mitigate this risk by primarily investing in debt instruments of high credit quality issuers, limiting credit concentration, monitoring the credit quality of issuers and counterparties and diversifying issuers. The weighted average rating of our fixed maturity investments was AA- with 91.0% and 89.4% rated investment grade or better (BBB- or higher) at September 30, 2022 and December 31, 2021, respectively.
We review our investments to identify and evaluate those that may have credit impairments on a quarterly basis, considering the historical performance of the security, available market information, and credit ratings, among other things. For fixed maturity securities, the review includes consideration
of current ratings and actions of major rating agencies (Standard & Poor's, Moody's and Fitch). If a security has two ratings, the lower rating is used. If a security has three ratings, the middle rating is used. The following table reflects the credit quality of our fixed maturity portfolio at September 30, 2022:
Our portfolio also includes alternative investments with a carrying value at September 30,
2022 and December 31, 2021 of $401.6 million and $387.2 million (8.2% and 7.3% of total invested assets), respectively. We may invest in both long and short equities, corporate debt securities, currencies, real estate, commodities and derivatives. We attempt to mitigate our risk by selecting managers with extensive experience, proven track records and robust controls and processes. We also attempt to mitigate our risk by diversifying through multiple managers and different types of assets and asset classes.
Commercial mortgage loans add portfolio diversification. These assets typically afford credit protections through covenants and deeper due diligence given information access. We also monitor debt service coverage ratios and loan-to-value ratios in our assessment of credit risk and exposure.
Equity Price Risk
We
hold a diversified portfolio of equity securities with a fair value of $43.9 million and $56.3 million (0.9% and 1.1% of total invested assets) at September 30, 2022 and December 31, 2021, respectively. Our equity securities are exposed to equity price risk which is defined as the potential for loss in fair value due to a decline in equity prices. We believe the diversification of our equity securities among various industries, market segments and issuers, as well as the use of multiple outside investment managers, mitigates our exposure to equity price risk.
We have exposure to foreign currency risk in our insurance contracts, invested assets and to a lesser extent, a portion of our debt. We attempt to manage our foreign currency risk by seeking to match our liabilities under insurance and reinsurance contracts that are payable in currencies other than the U.S. Dollar with cash and investments that are denominated in such currencies. We also use foreign exchange forward contracts to attempt to mitigate this risk. We recognized gains in the investment portfolio of $3.1 million for the three months and $7.3 million for the nine months ended September 30,
2022 on portfolio forward currency contracts. We recognized no losses in the investment portfolio for the three months and $1.0 million for the nine months ended September 30, 2022 on portfolio forward currency contracts. We recognized gains of $4.7 million and $12.5 million for the three and nine months ended September 30, 2022 on our operational foreign currency forward contracts. We recognized losses of $11.2 million and $36.7 million for the three and nine months ended September 30, 2022 on our operational foreign currency forward contracts.
We recognized losses of $4.2 million and $7.7 million for the three and nine months ended September 30, 2021 on our foreign currency forward contracts.
Item 4. Controls and Procedures
Argo Group, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), defines “disclosure controls and procedures”
as controls and procedures “designed to ensure that information required to be disclosed by the issuer in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.” Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 2022, at the reasonable assurance level to ensure that information required to be disclosed by Argo Group in the reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
There were no changes in internal control over financial reporting made during the quarter ended September 30,
2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Throughout this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to “Argo Group,”“we,”“us,”“our” or the “Company” mean Argo Group International Holdings, Ltd. and all of its subsidiaries, taken together as a whole.
Item 1. Legal Proceedings
We
and our subsidiaries are parties to legal actions from time to time, generally incidental to our and their business. While any litigation or arbitration proceedings include an element of uncertainty, management believes that the resolution of these matters will not materially affect our financial condition or results of operations.
Federal Securities Class Action
The Police & Fire Retirement System City of Detroit v. Argo Group International Holdings, Ltd., et al., No. 22-cv-8971 (S.D.N.Y.)
On October 20, 2022, a securities class action lawsuit was filed in the United States District Court for the Southern District of New York against the
Company and certain of its current and former officers, alleging securities fraud violations under sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiff alleges that from February 13, 2018 through August 9, 2022, Defendants made false and misleading statements concerning the Company’s reserves and underwriting standards. The Company is not able at this time to determine or predict the ultimate outcome of this proceeding or provide a reasonable estimate or range of estimates of the possible outcome or loss, if any, in this matter.
Item
1A. Risk Factors
In addition to the other information set forth in this report, readers should carefully consider the factors discussed in “Part I, Item 1A—Risk Factors” of Argo Group’s Annual Report on Form 10-K and Form 10-K/A for the year ended December 31, 2021 (collectively, “2021 Form 10-K”), and in the Company’s other filings with the SEC, which could materially affect the Company’s business, financial condition, cash flows or future results. There have been no material changes from the risk factors previously disclosed in in “Part I, Item 1A—Risk Factors” in the 2021 Form 10-K, except as described below.
We may be adversely affected by changes in economic and political conditions, including inflation and changes in interest rates.
The effects of inflation could cause the cost of claims to rise in the future. Our reserve for losses and loss adjustment expenses (“LAE”) includes assumptions about future payments for settlement of claims and claims handling expenses, such as medical treatments and litigation costs. To the extent inflation causes these costs to increase above reserves established for these claims, we will be required to increase our loss reserves with a corresponding reduction in our net income in the period in which the deficiency is identified. Furthermore, if we experience deflation or a lack of inflation going forward and interest rates are low or decline, we could experience low portfolio returns because we hold fixed income investments
of fairly short duration.
Additionally, our operating results are affected, in part, by the performance of our investment portfolio. Our investment portfolio may be adversely affected by inflation or changes in interest rates. Such adverse effects include the potential for realized and unrealized losses in a rising interest rate environment or the loss of income in an environment of prolonged low interest rates. Such effects may be further impacted by decisions made regarding such things as portfolio composition and duration given the prevailing market environment. Although we attempt to take measures to manage the risks of investing in changing interest rate environments, we may not be able to mitigate interest rate sensitivity effectively. During the third quarter of 2022, the pro forma Enhanced Capital Requirement (“ECR”) ratio for Argo Re increased primarily due to the inclusion of two recently announced transactions
– the U.S. loss portfolio transfer transaction with Enstar and the sale of Syndicate 1200 to Westfield. Argo Re’s pro forma ECR ratio is currently in excess of the Company’s risk tolerance. If Argo Re’s ECR ratio falls below the Company’s risk tolerance, Argo Re’s ability to pay dividends to the Company will be restricted. Economic and political conditions, including inflation and fluctuation in interest rates or failure to maintain Argo Re’s ECR ratio in excess of the Company’s risk tolerance would have a material adverse effect on our business, results of operations, financial condition and our ability to pay dividends to shareholders.
Our insurance subsidiaries are subject to risk-based capital and solvency requirements in their respective regulatory domiciles and any failure to comply with these requirements may have a material adverse effect on our business.
A risk-based capital system is designed to measure whether the amount of available capital is adequate to support the inherent specific risks of each insurer. Risk-based regulatory capital is calculated at least annually. Authorities use the risk-based capital formula to identify insurance companies that may be undercapitalized and thus may require further regulatory attention. The formulas prescribe a series of risk measurements to determine a minimum capital amount for an insurance company, based on the profile of the individual company.
The ratio of a company’s actual policyholder surplus to its minimum capital requirements will determine whether any regulatory action is required based on the respective local thresholds. The application and methods of calculating risk-based regulatory capital are subject to change, and the ultimate impact on our solvency position from any future material changes cannot be determined at this time.
Whereas the majority of our operations operate on the basis of ‘standard formula’ risk-based capital systems, the Argo Lloyd’s Platform consisting of Syndicate 1200 has secured approval from Lloyd’s for the use of customized Economic Capital Models, known as the Internal Models. These models are used to calculate regulatory capital requirements based on each Syndicate’s unique risk profile. The Internal Models have been subject to extensive internal and external scrutiny including independent validation activities. The use of any
complex mathematical model however exposes the organization to the risk that these models are not built correctly, contain coding or formulaic errors or rely on unreliable or inadequate data.
As a result of these and other requirements, we may have future capital requirements that may not be available to us on commercially favorable terms. Regulatory capital and solvency requirements for our future capital requirements depend on many factors, including our ability to underwrite new business, risk propensity and ability to establish premium rates and accurately set reserves at levels adequate to cover expected losses. To the extent that the funds generated by insurance premiums received and sale proceeds and income from our investment portfolio are insufficient to fund future operating requirements and cover incurred losses and loss expenses, we may need to raise additional funds through financings or curtail our growth and
reduce in size. Uncertainty in the equity and fixed maturity securities markets could affect our ability to raise additional capital in the public or private markets. Any future financing, if available at all, may be on terms that are not favorable to us and our shareholders. In the case of equity financing, dilution to current shareholdings could result, and the securities issued may have rights, preferences and privileges that are senior or otherwise superior to those of our common shares.
Failure to comply with the capital requirement laws and regulations in any of the jurisdictions where we operate, including the U.S., the E.U., the U.K. or Bermuda could result in administrative penalties imposed by a particular governmental or self-regulatory authority, unanticipated costs associated with remedying such failure or other claims, harm to our reputation, restrictions or prohibitions on the payment of dividends or other forms
of distributions, or interruption of our operations, any of which could have a material and adverse impact on our business, financial position, results of operations, liquidity and cash flows.
The outcome of legal and regulatory proceedings, investigations, inquiries, claims and litigation related to our business operations, and changes in the legal environment, may have a material adverse effect on our results of operations and financial condition.
We are regularly subject to, and are currently involved in, legal and regulatory proceedings, investigations, inquiries, claims and litigation in connection
with our business operations. Due to the inherent uncertainty of the outcomes of such matters, there can be no assurance that the resolution of any particular claim or proceeding would not materially adversely affect our results of operations and financial condition. Determining legal reserves or possible losses from such matters involves judgment and may not reflect the full range of uncertainties and unpredictable outcomes. Should any of our estimates and assumptions change or prove to have been incorrect, it could have a material adverse effect on our financial position, results of operations and cash flows. Investigations, inquiries, disputes, claims and regulatory and legal and arbitration proceedings, including securities, derivative action and class action litigation, can be expensive and disruptive and could materially adversely affect our financial position, results of operations and cash flows. Such matters, even if pending or not ultimately substantiated or
if indemnified or insured, may adversely impact us, including by disrupting our operations, diverting management resources and harming our reputation.
Significant changes in the legal environment could cause our ultimate liabilities to change from our current expectations. Such changes could be judicial in nature, like trends in the size of jury awards, developments in the law relating to tort liability or the liability of insurers, and rulings concerning the scope of insurance coverage or the amount or types of damages covered by insurance. In addition, changes in federal or state laws and regulations relating to the liability of insurers or policyholders, including state laws expanding “bad faith” liability and state “reviver” statutes, extending statutes of limitations for certain abuse claims, could result in changes in business practices, additional litigation, or could result in unexpected losses, including
increased frequency and severity of claims. It is impossible to forecast such changes reliably, much less to predict how they might affect our loss reserves or how those changes might adversely affect our ability to price our insurance products appropriately. Thus, significant judicial or legislative developments could adversely affect our business, financial condition, results of operations and liquidity.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchase of Equity Securities
On May 3, 2016, our Board of Directors authorized the repurchase of up to $150.0 million of our common shares (“2016 Repurchase Authorization”). The 2016 Repurchase
Authorization supersedes all the previous repurchase authorizations.
From January 1, 2022 through September 30, 2022, we did not repurchase any of our common shares. Since the inception of the repurchase authorizations (including those purchased under the 2016 Repurchase Authorization) through September 30, 2022, we have repurchased 11,318,339 of our common shares at an average price of $40.22 for a total cost of $455.1 million. These shares are being held as treasury shares in accordance with the provisions of the Bermuda Companies Act 1981. As of September 30, 2022, availability under the 2016 Repurchase Authorization for future repurchases of our common shares was $53.3 million.
Employees
are allowed to surrender shares to settle the tax liability incurred upon the vesting or exercise of shares under our various employee equity compensation plans. For the three months ended September 30, 2022, we received 7,975 common shares, with an average price paid per share of $28.56 that were surrendered by employees in payment for the minimum required withholding taxes. The following table provides information with respect to our common shares that were surrendered during the three months ended September 30, 2022. In the below table, these shares are included in columns (a) and (b), but excluded from columns (c) and (d). These shares do not reduce the number of shares that may yet be purchased under the repurchase plan.
Period
Total
Number of Shares Surrendered (a)
Average Price Paid per Share (b)
Total Number of Shares Purchased as Part of Publicly Announced Plan or Program (c)
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan or Program (d)
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.
