We lease office space in Bermuda, where our principal executive offices are located. Argo Group US leases office space in San Antonio, Texas, for its United States headquarters, its Commercial Specialty segment and for certain support functions. We also lease space in the following locations:
Consolidated gross realized gains were $54.4 million for the year ended December 31, 2012, as compared to $74.2 million and $47.3 million in 2011 and 2010, respectively. Included in gross realized gains for the year ended December 31, 2012 was a $4.8 million gain resulting from the favorable settlement of a tax contingency related to the sale of a subsidiary in 2005. Consolidated gross realized losses were $28.7 million, $25.0 million and $10.5 million for the years ended December 31, 2012, 2011 and 2010, respectively. Included in consolidated gross realized losses for the years ended December 31, 2012, 2011 and 2010 were write downs of approximately $3.7 million, $1.2 million and $0.8 million, respectively, from the recognition of other-than-temporary impairments on certain investment securities.
Beginning in 2011 and continuing into 2012, we purchased foreign currency 90 day forward contracts to manage currency exposure on losses related to the New Zealand and Japan earthquakes and Australian and Thai floods. The term of these contracts gives us flexibility to adjust the notional amount of the contracts based on payments made and changes in estimates of future losses. We do not apply hedge accounting to these contracts, and as a result, all gains (losses) are recognized in net realized investment and other gains. For the year ended December 31, 2012, we recognized $0.6 million in foreign currency exchange losses related to the loss reserves recorded for these events, which were offset by $0.5 million in realized gains from the currency forward contracts. For the year ended December 31, 2011, we recognized $4.3 million in foreign currency exchange losses related to the loss reserves recorded for these events, which were offset by $4.6 million in realized gains from the currency forward contracts. The foreign currency exchange losses related to these loss reserves and the realized gains from the currency forward contracts are reported under the Corporate and Other segment.
Consolidated losses and loss adjustment expenses were $747.6 million for the year ended December 31, 2012, compared to $863.1 million and $777.5 million for the same periods in 2011 and 2010, respectively. Included in losses and loss adjustment expenses for the year ended December 31, 2012 was $75.2 million in catastrophe losses for storm activity in the United States, including Hurricane Sandy and Hurricane Isaac. Partially offsetting these catastrophe losses was $32.9 million in net favorable loss reserve development on prior accident years. The Excess and Surplus Lines segment had $48.0 million of net favorable loss reserve development on prior accident years primarily attributable to favorable development in the general and products liability lines of business, the automobile liability lines of business and unallocated loss adjustment reserves. The International Specialty segment had $7.2 million of net favorable loss reserve development primarily attributable to short-tail non-catastrophe losses. Syndiate 1200 segment had $9.7 million of net favorable reserve development primarily attributable to favorable development in the property facultative, North American binder and Directors and Officers classes of business, partially offset by unfavorable development in the general liability property class of business. Partially offsetting this favorable loss reserve development was $22.2 million in net unfavorable loss reserve development in the Commercial Specialty segment primairly attributable to unfavorable development in general liability and automobile liability lines of business, partially offset by favorable development in the workers compensation and short-tail lines. The Run-off Lines segment had $9.8 million in net unfavorable loss reserve development primarily attributable to unfavorable development in general liability lines resulting from asbestos exposure.
Included in losses and loss adjustment expenses for the year ended December 31, 2011 was $208.6 million in catastrophe losses resulting from the Japan and New Zealand earthquakes, storm activity in the United States and flooding in Australia and Thailand. Additionally, we recognized $9.3 million in losses under aggregate reinsurance covers. Partially offsetting these 2011 accident year losses was $3.4 million in net favorable loss reserve development on prior accident years. The Excess and Surplus Lines segment had $33.8 million in net favorable loss reserve development primarily in the general and products liability lines. The Commercial Specialty segment had $8.4 million of net unfavorable loss reserve development primarily in general liability, partially offset by favorable development in the workers compensation lines of business and in an assumed directors and officers program. The International Specialty segment had net favorable loss reserve development of $4.6 million primarily attributable to short-tail non-catastrophe losses. The Syndicate 1200 segment had net unfavorable loss reserve development of $18.7 million in the liability lines and the property lines of business. The Run-off Lines segment had $7.9 million in net unfavorable loss reserve development attributable to asbestos and environmental exposure in the general liability lines and the legacy reinsurance claims, partially offset by favorable reserve development in the run-off workers compensation lines.
The following table summarizes the above referenced loss reserve development as respects to prior year loss reserves by line of business for the year ended December 31, 2012:
When determining reserve levels, we recognize that there are several factors that present challenges and uncertainties to the estimation of loss reserves. Examples of these uncertainties include changes to the reinsurance structure and potential increases in inflation. Our net retained losses vary by product and they have generally increased over time. To properly recognize these uncertainties, actuarial reviews have given significant consideration to the paid and incurred Bornhuetter-Ferguson (“BF”) methodologies. Compared with other actuarial methodologies, the paid and incurred BF methods assign smaller weight to actual reported loss experience, with the greatest weight assigned to an expected or planned loss ratio. The expected or planned loss ratio has typically been determined using various assumptions pertaining to prospective loss frequency and loss severity. In setting reserves at December 31, 2012, we continued to consider the paid and incurred BF methods for recent years.
Consolidated loss and loss adjustment expense reserves were $3,223.5 million (including $161.6 million of reserves attributable to Argo International’s trade capital providers), $3,291.1 million (including $196.6 million of reserves attributable to the trade capital providers) and $3,152.2 million (including $185.3 million of reserves attributable to the trade capital providers) as of
December 31, 2012, 2011 and 2010, respectively. 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, there can be no assurance that future loss development, favorable or unfavorable, will not occur.
Consolidated underwriting, acquisition and insurance expenses were $464.5 million, $425.7 million and $466.0 million for the years ended December 31, 2012, 2011 and 2010, respectively. The increase in the consolidated expense ratio for 2012 as compared to 2011 reflects approximately $13.1 million of increased expense related to our investments in start-up operations abroad. The increase in the consolidated expense ratio for 2011 as compared to 2010 reflects approximately $7.6 million of expense related to our investments in start-up operations abroad (primarily in Brazil) and a new information technology business delivery platform.
In November 2012, we redeemed our $103.1 million 8.85% Capital Trust Securities at 102.09% of par value and $15.5 million of 9.75% Capital Trust Securities at 100.975% of par value, plus accrued and unpaid interest to the redemption date. Interest on the Capital Trust Securities ceased to accrue on and after the redemption dates. Redemption of Capital Trust Securities resulted in the recognition of a call premium of $2.2 million and a write-off of $0.4 million in unamortized bond discount for the year ended December 31, 2012.
Consolidated foreign currency exchange loss was $4.3 million and $3.5 million for the years ended December 31, 2012 and 2011, respectively, compared to a gain of $3.8 million for the same period ended 2010. For the years ended December 31, 2012 and 2011, non-U.S. Dollar currencies strengthened against the U.S. Dollar resulting in the foreign currency exchange loss. By comparison, for the year ended December 31, 2010, non U.S. Dollar currencies weakened considerably against the U.S. Dollar, resulting in the foreign currency exchange gain.
The consolidated provisions for income taxes were $14.4 million, $20.0 million and $35.2 million for the years ended December 31, 2012, 2011 and 2010, respectively. The consolidated income tax provision represents the income tax expense associated with our operations based on the tax laws of the jurisdictions in which they operate. Therefore, the consolidated provision for income taxes represents taxes on net income for our United States, Ireland, Belgium, Brazil, Switzerland, and United Kingdom operations. The consolidated tax provision for the year ended December 31, 2012 primarily represents taxes on net income from our operations in the United States and United Kingdom. For the year ended December 31, 2011, the tax provision generated by our operations based in the United States was partially offset by tax benefits for our operations based in the United Kingdom. Included in the consolidated provision for income taxes for the year ended December 31, 2010 was $1.3 million in tax expense from Argo Ireland to the Internal Revenue Service for withholding on dividends received from Argo Group US.
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. Management excludes realized investment gains
Included in losses and loss adjustment expenses for the year ended December 31, 2012 was $12.6 million in catastrophe losses from storm activity in the United States, including $8.2 million from Hurricane Isaac and $2.6 million from Hurricane Sandy. Offsetting these catastrophe losses was $48.0 million of net favorable loss reserve development on prior accident years primarily attributable to $39.2 million of favorable development in the general and products liability lines of business, $1.9 million of favorable development in the automobile liability lines of business and $5.5 million of favorable development related to unallocated loss adjustment expense reserves.
Included in losses and loss adjustment expenses for the year ended December 31, 2012 was $16.7 million in catastrophe losses from storm activity in the United States, including $8.8 million from Hurricane Sandy. In addition, Commercial Specialty experienced several large non-cat property losses during the year. The Commercial Specialty segment had net unfavorable loss development of $22.2 million primarily attributable to $31.5 million of unfavorable development in general liability due to increases in claim severity and $5.5 million of unfavorable development in the automobile liability lines of business. Partially offsetting this unfavorable development was $10.1 million of favorable development in workers compensation, $2.7 million of favorable development due to a reduction in ceded reinsurance bad debt reserves and $2.0 million of favorable development in short-tail lines.
Included in losses and loss adjustment expenses for the year ended December 31, 2011 was $21.0 million in catastrophe losses from storm activity in the United States, including Hurricane Irene and the Alabama and Joplin, Missouri tornados. The
The increase in fee income, net of expenses, for the year ended December 31, 2012 as compared to 2011 and 2010 was primarily attributable to a reduction in the expenses related to the generation of the fee income.
The following table summarizes the results of operations for the International Specialty segment:
development in short-tail non-catastrophe losses, $0.3 million of favorable development in long-tail professional liability and $0.3 million of favorable development related to short-tail catastrophe losses due to the 2008 hurricanes, partially offset by $0.8 million of unfavorable development related to short-tail catastrophe losses due to the 2010 and 2011 catastrophe events.
Losses and loss adjustment expenses for the year ended December 31, 2010 reflect $32.2 million in catastrophe losses resulting primarily from earthquake activity and the Deepwater Horizon incident. Included in losses and loss adjustment expenses for the year ended December 31, 2010 was $16.8 million of favorable prior year loss reserve development. The prior year development was primarily the result of $14.5 million of favorable loss reserve development in non-catastrophe property due to favorable reported loss activity and $1.1 million of favorable loss reserve development on 2008 hurricane reserves.
premiums for the years ended December 31, 2012, 2011 and 2010, respectively. The increase in written premiums in 2012 was primarily attributable to increased exposure in the general liability and professional indemnity lines, coupled with entering the international casualty treaty line in 2012. The specialty division wrote $83.6 million and $54.1 million for the years ended December 31, 2012 and 2011, respectively. The aerospace division wrote $23.3 million and $9.7 million in premiums for the years ended December 31, 2012 and 2011, respectively. The increases in the specialty and aerospace divisions were due to the divisions now being in place for a full year, as these divisions began writing business in the first half of 2011.
Included in losses and loss adjustment expenses for the year ended December 31, 2011 was $61.9 million of catastrophe losses consisting of $29.2 million from the New Zealand and Japan earthquakes, $21.8 million from the Thailand and Australia floods and the Danish Cloudburst and $10.9 million from storms in the United States. Additionally, included in losses and loss adjustment expenses for 2011 was $18.7 million in unfavorable prior year development primarily driven by a reduction in the estimate of future reinsurance recoveries for various liability classes of business and unfavorable development related to the medical malpractice and discontinued liability lines of business where the claims experience was worse than expected.
Included in losses and loss adjustment expenses for the year ended December 31, 2010 was $23.8 million of catastrophe losses primarily attributable to the earthquakes in Chile, New Zealand and Haiti. Additionally, included in losses and loss adjustment expenses for 2010 was $4.4 million of net unfavorable loss development related to $14.2 million of unfavorable development in the liability lines of business partially offset by $9.8 million of favorable development in the property lines of business.
Loss reserves as of December 31, 2012 were $738.9 million, which includes $161.6 million attributable to trade reinsurers, compared to $755.3 million, which includes $196.6 million of reserves attributable to the trade capital providers as of December 31, 2011.
On December 31, 2012, Syndicate 1200 entered into a whole account quota share contract covering the 2009 and prior years of account. The counterparty was another syndicate within Lloyd’s. An immaterial deferred gain was recorded as a result of this transaction.
Losses and loss adjustment expenses for the year ended December 31, 2011 included $7.9 million in net unfavorable loss reserve development on prior accident years primarily due to $11.7 million of unfavorable development in general liability lines resulting from asbestos and environmental exposure, $4.6 million of unfavorable development on legacy reinsurance claims primarily related to Hurricanes Katrina, Rita and Wilma, and unfavorable development related to the unwinding of the workers compensation reserve discount. The unfavorable development was partially offset by favorable development on workers compensation including the collection of a contribution settlement from another insurer for a California indemnity claim, and favorable development in other lines. The asbestos and environmental unfavorable development was primarily attributable to $8.2 million for asbestos losses driven by increasing severities, defense costs and the settlement of a disputed reinsurance recoverable matter, and $3.5 million for environmental losses driven by one significant environmental loss.
Losses and loss adjustment expenses for the year ended December 31, 2010 included $1.9 million in net favorable loss reserve development on prior accident years. The favorable development included $9.0 million of favorable loss reserve development for workers compensation lines, $2.6 million of favorable loss reserve development for reinsurance non-catastrophe lines and $0.8 million in unallocated loss adjustment expense. Partially offsetting the favorable development was $9.5 million in unfavorable reserve development resulting from strengthening the reserves for our asbestos and environmental exposure and $1.0 million due to the unwinding of the workers compensation reserve discount.
The following table represents a reconciliation of total gross and net reserves for the Run-off Lines for each of the years in the three-year period ended December 31, 2012. Amounts in the net column are reduced by reinsurance recoverables.
We perform an extensive actuarial analysis of the asbestos and environmental reserves on at least an annual basis. The process is typically completed in the third quarter of the calendar year and updated during the fourth quarter. We continually monitor the status of the claims, and may make adjustments outside of the annual review period. The review entails a detailed analysis
The number of claims opened during the three years ended December 31, 2012 were as follows:
The following table represents gross payments on asbestos and environmental claims for each of the years in the three-year period ended December 31, 2012:
For the years ended December 31, 2012, 2011 and 2010, net cash used by financing activities was $33.8 million, $61.6 million and $115.4 million, respectively. During 2012, our use of cash is attributed to $117.2 million for the redemption of our two fixed rate trust preferred securities, the repurchase of approximately 1.5 million shares of our common stock for a total cost of $44.2 million and the payment of dividends to our shareholders totaling $12.3 million. In 2012, the use of cash was offset by $138.7 million in net cash proceeds from the issuance of senior unsecured fixed rate notes. During 2011, our use of cash was primarily attributed to the repurchase of approximately 1.6 million shares of our common stock for a total cost of $49.5 million, and the payment of dividends to our shareholders totaling $13.1 million. During 2010, our use of cash was primarily attributed to the repurchase of approximately 3.2 million shares of our common stock for a total cost of $105.2 million and the payment of dividends to our shareholders totaling $14.2 million.
The payment of dividends by Argo Re is limited under Bermuda insurance laws, which require Argo Re to maintain certain measures of solvency and liquidity. As of December 31, 2012, Argo Re’s solvency and liquidity margins and statutory capital
Under certain insurance programs (i.e., large deductible programs and surety bonds) and various reinsurance agreements, collateral and letters of credit are held for our benefit to secure performance of insureds and reinsurers in meeting their obligations. At December 31, 2012, the amount of such collateral and letters of credit held under insurance and reinsurance
A summary of our outstanding junior subordinated debentures at December 31, 2012 is presented below:
Throughout 2012, 2011 and 2010, we had no preferred shares outstanding.
On February 18, 2011, our Board of Directors authorized the repurchase of up to $150.0 million of our common shares. The 2011 Repurchase Authorization supersedes the November 13, 2007 repurchase authorization which also had authorized the repurchase of up to $150.0 million of our common shares. From January 1, 2012 through January 17, 2013, the last trading day of the Rule 10b5-1 repurchase plan that was initiated on December 14, 2012, we have repurchased 1,659,788 shares of our
common stock for a total cost of $50.6 million. Since the inception of the repurchase authorizations through January 17, 2013, we have repurchased 6,631,093 shares of our common stock at an average price of $31.90 for a total cost of $211.5 million. These shares are being held as treasury shares in accordance with the provisions of the Bermuda Companies Act 1981. As of January 17, 2013, availability under the 2011 Repurchase Authorization for future repurchases of our common shares was $64.9 million.
We believe we maintain sufficient liquidity to pay claims and expenses, as well as satisfy our commitments in the event of unforeseen events such as reinsurer insolvencies, inadequate premium rates, or reserve deficiencies.
Credit risk is a major factor of our overall enterprise risk, and we have established policies and procedures to evaluate our exposure to credit risk, particularly with respect to our investment holdings and our receivable balances. In particular, we are exposed to credit risk on losses recoverable from reinsurers and receivables from insureds. Downturns in one sector or market can adversely impact other sectors and may result in higher credit exposure. We do not currently use credit default swaps to mitigate our credit exposure from either investments or counterparties.
The report of the independent auditors, the consolidated financial statements of Argo Group International Holdings, Ltd. and the supplementary financial statements called for by this Item 8 are included in this report beginning on page and are incorporated herein by reference.