The decline in consolidated earned premiums for the year ended December 31, 2010 as compared to the same period ended 2009 was the result of a reduction in gross written premiums across all segments, with the exception of our Reinsurance segment. Earned premiums within our U.S segments declined from $903.7 million (on gross written premiums of $1,130.3 million) for the year ended December 31, 2009 to $822.9 million (on gross written premiums of $962.7 million) for the same period in 2010. Our U.S. operations have continued to experience competition and declining rates. As a result, we have discontinued the writing of several programs, primarily within the Commercial Specialty segment, where profitability has declined in recent years. Earned premiums at Argo International have declined from $424.1 million (on gross written premiums of $706.0 million) for the year ended December 31, 2009 to $290.1 million (on gross written premiums of $389.9 million) for the same period ended 2010. The decrease in written premiums in 2010 was driven by a planned reduction in property binder business and by significant competition in direct and facultative brokered business. Additionally, we have increased our emphasis on profitability rather than premium growth across all business lines. Argo Re contributed earned premiums of $100.2 million (on gross written premiums of $176.1 million) for the year ended December 31, 2010 compared to $87.3 million (on gross written premiums of $152.6 million) for the same period ended 2009. The increase in gross written and earned premiums at Argo Re was primarily due to new business written by our casualty and professional lines unit, which began operation in the second quarter of 2009. The increase in consolidated gross written premiums and earned premiums for the year ended December 31, 2009 as compared to the same period in 2008 was primarily attributable to the operations of Argo Re and Argo International.
Index to Financial Statements Consolidated net investment income decreased for the year ended December 31, 2010 as compared to the same period ended 2009 due to lower investment yields and reduced operating cash flows due to the reduction in gross written premiums discussed above. Consolidated net investment income decreased for the year ended December 31, 2009 as compared to the same period in 2008 due to lower investment yields, which were partially offset by higher total invested assets resulting from positive operating cash flows. Total invested assets at December 31, 2010 were $4,045.0 million, net of $170.4 million of invested assets attributable to Argo International’s trade capital providers. Total invested assets at December 31, 2009 were $4,099.0 million, net of $235.3 million of invested assets attributable to the trade capital providers. Total invested assets at December 31, 2008 were $3,779.6 million, net of $215.8 million of invested assets attributable to the trade capital providers.
Consolidated gross realized gains were $47.3 million for the year ended December 31, 2010, as compared to $47.4 million and $22.1 million in 2009 and 2008, respectively. Consolidated gross realized losses were $10.5 million, $64.1 million and $57.2 million for the years ended December 31, 2010, 2009 and 2008, respectively. Included in consolidated gross realized losses for the years ended December 31, 2010, 2009 and 2008 were write downs of approximately $0.8 million, $45.0 million and $51.3 million, respectively, from the recognition of other-than-temporary impairments on certain investment securities.
Consolidated losses and loss adjustment expenses were $777.5 million for the year ended December 31, 2010, compared to $853.1 million and $724.9 million for the same periods in 2009 and 2008, respectively. Included in consolidated losses and loss adjustment expenses for the 2010 accident year was $77.3 million in catastrophe losses resulting from earthquakes in Haiti, Chile and New Zealand, U.S. Storm losses, the Deepwater Horizon incident and Queensland flooding. Also included in losses and loss adjustment expenses was $43.1 million in favorable loss reserve development on prior accident years. The Excess and Surplus Lines segment had $19.0 million in favorable loss reserve development primarily in the casualty and professional liability lines of business. The Commercial Specialty segment had $9.8 million of favorable loss reserve development primarily within the workers compensation lines of business and in an assumed directors and officers program. The Reinsurance segment had favorable loss reserve development of $16.8 million primarily attributable to short-tail non-catastrophe losses. The International Specialty segment had net unfavorable loss reserve development of $4.4 million attributable to $14.2 million of unfavorable loss reserve development in the liability lines of business and $9.8 million of favorable loss reserve development in the property lines of business. The Run-off Lines segment had net favorable loss reserve development of $1.9 million due to $8.0 million of favorable loss reserve development related to risk management run-off reserves, $2.6 million of favorable loss reserve development on legacy PXRE claims, $0.8 million of favorable loss reserve development related to unallocated loss adjustment reserves, partially offset by $9.5 million of unfavorable loss reserve development in asbestos and environmental lines.
Included in consolidated losses and losses adjustment expenses for the year ended December 31, 2008 was $72.3 million in losses resulting from hurricane activity in the United States during the third quarter of 2008. Consolidated losses and loss adjustment expenses for 2008 also include $22.5 million in property losses resulting primarily from severe weather during the second quarter of 2008 and $18.9 million of losses in certain casualty lines of business resulting from higher than expected severity in the fourth quarter of 2008. The year ended December 31, 2008 included $61.2 million in favorable loss reserve development on prior accident years. The Excess and Surplus Lines segment had favorable loss reserve development of $39.6 million driven by property lines in the 2006 and 2007 accident years and general liability lines in older accident years. The Commercial Specialty segment had $8.2 million of favorable loss reserve development driven by an assumed directors and officers program and the workers compensation line of business. The Reinsurance segment had favorable loss reserve development of $2.7 million. The International Specialty segment had unfavorable loss reserve development of $3.5 million. The Run-off Lines segment had $14.2 million of net favorable loss reserve development primarily driven by favorable loss reserve development on legacy PXRE claims partially offset by unfavorable loss reserve development in asbestos and environmental lines.
For the Run-off Lines segment, in determining appropriate reserve levels, we maintained the same general processes and disciplines that were used to set reserves at prior reporting dates. No changes in key assumptions were made to estimate the reserves since the last reporting date; however the maturation of claims for twelve additional months since the date of our last comprehensive review provided the actuaries with a basis to assign greater credibility to emerged loss development patterns.
Consolidated underwriting, acquisition and insurance expenses were $472.6 million, $517.9 million and $407.1 million for the years ended December 31, 2010, 2009 and 2008, respectively. The increase in the expense ratio for 2010 as compared to 2009 was primarily attributable to declining premium volumes. Expense ratios for the years ended December 31, 2009 and 2008 were comparable. Included in consolidated underwriting, acquisition and insurance expenses for the year ended December 31, 2008 was $63.0 million resulting from Argo International.
Consolidated interest expense was $22.9 million, $25.7 million and $30.5 million for the years ended December 31, 2010, 2009 and 2008, respectively. The decrease in interest expense was due to reduced interest rates and the repayment of outstanding balances on our revolving line of credit during 2009.
Consolidated provisions for income taxes were $32.7 million, $24.9 million and $23.5 million for the years ended December 31, 2010, 2009 and 2008, respectively. 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. Included in the consolidated provision for income taxes for the year ended December 31, 2009 was a $5.6 million tax refund received from the state of California due to a favorable tax settlement. Offsetting this tax refund was $7.7 million in tax expense from Argo Ireland to the Internal Revenue Service for withholding on dividends received from Argo Group US. 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. Additionally, our tax rates for years presented were impacted by fluctuations in foreign exchange rates within the International Specialty segment.
Index to Financial Statements 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 and losses from segment results, as decisions regarding the sales of investments are made at the corporate level. Although this measure of profit (loss) does not replace net income (loss) computed in accordance with generally accepted accounting principles in the United States (“GAAP”) as a measure of profitability, management utilizes this measure of profit (loss) to focus its reporting segments on generating operating income.
The increase in the loss ratio in 2010 compared to 2009 was primarily attributable to $16.8 million in storm related losses. The Commercial Specialty segment recognized $9.8 million of favorable reserve development on prior accident year’s loss reserves in 2010. This favorable loss reserve development was comprised primarily of $5.6 million of favorable loss reserve development in our workers compensation lines and $4.4 million of favorable loss reserve development in an assumed Directors and Officers program. This favorable loss reserve development was partially offset by unfavorable loss reserve development in liability lines.
Included in losses and loss adjustment expenses for the year ended December 31, 2008 was $2.8 million in losses resulting from hurricane activity and $12.5 million in other property losses, primarily attributable to other storm activity and $12.3 million in casualty losses, workers compensation and commercial automobile lines. Additionally in 2008, the Commercial Specialty segment recognized $8.2 million of net favorable development primarily comprised of $5.0 million of favorable development in an assumed Directors and Officers program, $4.0 million of favorable development in workers compensation lines, $1.5 million of favorable development in property lines, $3.8 million of favorable development in other liability lines and $6.1 million of adverse development in commercial automobile products.
The expense ratio for the year ended December 31, 2010 and 2009 was at 32.4% and 29.7%, respectively. The increase in the expense ratio was primarily attributable to lower premium volumes and reduced ceding commissions received on the state fund program, coupled with an increase in the allocation of operating expenses to underwriting activities. The expense ratio for the year ended December 31, 2009 and 2008 was at 29.7% and 28.5%, respectively. The increase was mainly attributable to reduced ceding commissions received on the state funds program due to lower premium volumes, along with a business shift to large deductible products from guaranteed cost products in our coal mining business.
The decrease in the expense ratio for the year ended December 31, 2010 as compared to 2009 was due to increased ceding commissions. The increase in the expense ratio for the year ended December 31, 2009 as compared to 2008 was primarily attributable to increased staffing and related costs associated with starting the new casualty and professional lines units. Expenses associated with these units, as is typical for a start up operation, are disproportionately higher than the rate at which premiums are earned.
Index to Financial Statements Earned premiums represent premiums earned on the portion of gross written premiums retained by Argo Group. During 2010, International Speciality increased its participation in the syndicate it manages to 62%, compared to 61% and 54% for 2009 and 2008, respectively. For the years ended December 31, 2010 and 2009, the property division wrote $262.2 million and $522.4 million, respectively. The casualty division wrote $127.7 million and $183.6 million for the same respective periods. Premiums written in 2008 are not comparable to 2009 and 2010 as Argo International was acquired in May 2008 with written premiums representing the last seven months of 2008. Gross written premiums for 2010 were reduced by $7.7 million due to changes in premium estimates related to business bound in prior periods. Gross written premiums for 2009 include $61.3 million for increased writings related to property binder business stemming from late reported premium from prior periods of which $43.3 million was earned at December 31, 2009. The decrease in property written premiums in 2010 was driven by a planned reduction in property binder business and by significant competition in direct and facultative brokered business. The decrease in casualty gross written premiums in 2010 was driven by Argo Group being more selective in accepting risks within a highly competitive market.
Losses and loss adjustment expenses are reported net of losses ceded to the trade capital providers. The loss ratio for the year ended December 31, 2010 was 70.0% compared to December 31, 2009, which was 57.6%. The increase in the loss ratio in 2010 was primarily related to higher property catastrophe losses during 2010 from earthquakes in Chile, New Zealand and Haiti causing $21.7 million of losses, and $2.1 million of losses related to December flooding in Queensland, Australia. The 2009 loss ratio of 57.6% was lower than the 2008 loss ratio of 77.9% primarily due to lower catastrophe losses in 2009. The 2008 year included $40.7 million in losses resulting from hurricanes Gustav and Ike. Unfavorable loss reserve development on prior accident years during 2010 and 2009 was $4.4 million and $23.5 million, respectively. The 2009 loss development was offset by additional premiums of $24.1 million with both the additional premium and losses primarily related to the late reported property binder business. Included in 2008 losses and loss adjustment expenses was $3.5 million of unfavorable loss development related to property facultative claims from the 2006 year of account.
The increase in the expense ratio for the year ended December 31, 2010 compared to December 31, 2009 was primarily the result of decreased premium volume. The increase in 2009 as compared to 2008 was primarily the result of a different mix of business. The change in business mix resulted in higher commission program business and less open market property business. Additionally, 2009 included expenses for post-acquisition costs associated with integrating the International Specialty segment into the business.
Index to Financial Statements Earned premiums for the years ended December 31, 2010 and 2009 were primarily attributable to adjustments resulting from final audits, reinstatement premiums and other adjustments on policies previously written. Earned premiums for the year ended December 31, 2008 were reduced by $15.0 million in ceded premiums due to the expiration of a reinsurance contract in 2008, in addition to decreased reinstatement premiums on reinsurance programs previously written.
Losses and loss adjustment expense for the year ended December 31, 2008 included $14.2 million in net favorable loss reserve development on prior accident years. Included in losses and loss adjustment expenses for the year ended December 31, 2008 was $12.5 million favorable loss reserve development on prior accident years for PXRE non-catastrophe property lines and $5.0 million favorable loss development related to PXRE’s 2005 hurricane losses and $1.7 million of favorable loss reserve development in risk management lines. Partially offsetting this favorable development was $5.0 million of unfavorable loss reserve development on prior accident years, primarily driven by strengthening the reserves for our asbestos and environmental exposure.
The following table represents the components of gross loss reserves for the Run-off Lines for each of the years in the three-year period ended December 31, 2010:
Index to Financial Statements Management uses various actuarial methods to determine its best estimate of losses for the asbestos and environmental exposure within the Run-off Lines segment, which resulted in a range of potential ultimate liability, net of reinsurance, of approximately $70 million to $130 million. In determining its best estimate, management primarily relied on a method that projects future reported claims and severities, with some weight given to other methods. This method relies most heavily on our historical claims and severity information, whereas other methods rely more heavily on industry information. The method produces an estimate of losses that have been incurred but not yet reported based on projections of future claims and the average severity for those future claims. The severities were calculated based on our specific data and in management’s opinion best reflect our liabilities based upon the insurance policies issued.
The following table represents gross payments on asbestos and environmental claims for each of the years in the three-year period ended December 31, 2010:
For the year ended December 31, 2010, net cash provided by investing activities was $183.9 million as compared to net cash used by investing activities for the years ended December 31, 2009 and 2008 of $240.8 million and $115.4 million, respectively. In 2010, cash was provided by maturities and the proceeds from the sale of investments which were used to repurchase our common stock and to pay dividends. In 2009, cash was primarily used to acquire fixed maturity securities. As of December 31, 2010, 2009 and 2008, $375.3 million, $439.3 million and $513.6 million, respectively, of the investment portfolio were invested in short-term investments.
For the years ended December 31, 2010, 2009 and 2008, net cash used by financing activities was $115.4 million, $48.1 million and $11.6 million, respectively. During 2010, our use of cash was primarily attributed to the repurchase of 3,217,561 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 increase in cash used in financing activities in 2009 primarily resulted from the net cash payment on the revolving credit facility.
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, 2010, Argo Re’s solvency and liquidity margins and statutory capital and surplus were in excess of the minimum levels required by the Insurance Act. As of December 31, 2010, the unaudited statutory capital and surplus of Argo Re was estimated to be $1,251.0 million and the amount required to be maintained was estimated to be $268.7 million, thereby allowing Argo Re the potential to pay dividends or capital distributions within the parameters of the solvency and liquidity margins. We believe that the dividend and capital distribution capacity of Argo Re will provide us with sufficient liquidity to meet our operating and debt service commitments, as well as other obligations.
As a mid-level holding company, Argo Ireland is largely dependent on dividends or other permitted payments from Argo Group US to fund its operating expenses and to fund dividends or share capital reductions to Argo Re. Argo Group US is a mid-level holding company owned by Argo Ireland and is largely dependent on dividends and other permitted payments from its insurance subsidiaries to fund its operating expenses, fund debt service, or to fund dividends to Argo Ireland. Each holding company is subject to their respective domiciliary regulations and tax laws. We believe that Argo Ireland and Argo Group US each have sufficient dividend and capital distribution capacity to meet the operating and capital needs of their parents.
During 2011, Argonaut Insurance Company may be permitted to pay dividends of up to $13.1 million in cash without approval from the Illinois Department of Insurance, based on the state of domicile’s ordinary dividend calculation. Colony may be permitted to pay dividends of up to $53.5 million in cash without approval from the Virginia Bureau of Insurance, based on the state of domicile’s ordinary dividend calculation. Rockwood may be permitted to pay dividends of up to $13.7 million in cash without approval from the Pennsylvania Department of Insurance, based on the state of domicile’s ordinary dividend calculation. Business and regulatory considerations may impact the amount of dividends actually paid, and prior approval of dividend payments may be required.
We borrowed $15.0 million against the New Credit Agreement in June 2010, which was repaid during the third quarter of 2010. Currently, we do not have an outstanding balance under the $150.0 million credit facility. The credit facility allows up to $15.0 million of the facility to be used for letters of credit, subject to availability under the line. Currently, we have a $0.2 million letter of credit issued and outstanding under the facility.
We have two additional LOC facilities totaling $500 million that allow us to provide LOCs to our ceding companies if such LOC is required under the terms of the contract and to Lloyd’s to be filed on behalf of Argo (No. 604) Limited, our corporate member at Lloyd’s. All of the facilities require us to provide collateral in the form of fixed maturity securities or cash to the issuing bank as security for the outstanding LOCs. We also have an LOC facility that has been terminated under which we still have outstanding LOCs. We no longer have the ability to issue new LOCs from this facility. We must transfer eligible assets to collateral accounts prior to each respective bank issuing an LOC. Since eligible assets include fixed income investments, such securities need not be sold in order to qualify as eligible collateral. At December 31, 2010, we have pledged assets with a fair value of $163.5 million to support outstanding letters of credit.
We assumed debt through the acquisition of Argo International. At December 31, 2010, the outstanding balance on this debt was $64.2 million. The total debt is comprised of two U.S. denominated notes (issued in 2004 and 2006) and three Euro denominated notes (issued 2005, 2006 and 2007). The debt is unsecured, and each note has an option to repay in full on any interest payment date following the fifth anniversary of issue. No principal payments were made on these notes during 2010 or 2009 or 2008. These notes mature beginning in 2034.
Index to Financial Statements Throughout 2010, we had no preferred shares outstanding.
On November 13, 2007, our Board of Directors authorized the repurchase of up to $150.0 million of Argo Group’s common shares. From January 1, 2010 through February 22, 2011, we have repurchased 3,623,851 shares of our common stock for a total cost of $121.3 million. Since the inception of the buy-back program in 2007, we have repurchased 3,769,850 shares at an average price of $33.54 for a total cost of $126.4 million. These shares are being held as treasury shares in accordance with the provisions of the Bermuda Companies Act 1981.
We invest excess cash in a variety of investment securities. As of December 31, 2010, our investment portfolio consisted of 79.7% fixed maturities, 7.7% equity securities, 3.7% other investments and 8.9% short-term investments (based on fair value) compared to 81.5% fixed maturities, 6.2% equity securities, 2.2% other investments and 10.1% short-term investments for the same period in 2009. We classify the majority of our investment portfolio as available-for-sale; resulting in these investments being reported at fair market value, with unrealized gains and losses, net of tax, being reported as a component of shareholders’ equity. At December 31, 2010, no investments were designated as trading. No issuer (excluding United States Government and United States Governmental agencies) of fixed income or equity securities represents more than 3.7% of shareholders’ equity at December 31, 2010.
Our insurance subsidiaries require liquidity and adequate capital to meet ongoing obligations to policyholders and claimants, and to fund operating expenses. During the year ended December 31, 2010, we used cash flows from operations of $3.1 million. Cash flow from investing activities satisfied this use of cash. Additionally, based on current premium volumes and other measures of capital deployed in our business, we determined we had excess capital and, therefore, returned capital to our shareholders through the share buy-back program and through dividend payments to our shareholders. We believe our liquidity generated from operations and, if required, from our investment portfolio, will be sufficient to meet our obligations for the foreseeable future. We believe we have access to various sources of liquidity including cash, investments and the ability to borrow under our revolving credit facility. Additionally, we continue to have access to the debt and equity markets, though we currently do not foresee needing access to these sources of liquidity.
Index to Financial Statements We control our credit exposure related to financial instruments by limiting exposure to any one counterparty and mandating minimum credit ratings. We utilize specific criteria to judge the credit quality of our investments and counterparties, and also review ratings published by various credit rating services, if available.