For the year ended December 31, 2012, we reported net income of $52.3 million, or $2.01 per fully diluted share. For the year ended December 31, 2011, we reported net loss of $81.9 million, or ($3.02) per fully diluted share. For the year ended December 31, 2010, we reported net income of $86.7 million, or $2.90 per fully diluted share.
The increase in consolidated earned premiums for the year ended December 31, 2012 as compared to the same period in 2011 was due to increased premiums writings across all jurisdictions. Earned premiums for our London operations increased to $337.9 million (on gross written premiums of $533.4 million) for the year ended December 31, 2012 from $259.3 million (on gross written premiums of $438.5 million) and $290.1 million (on gross written premiums of $389.9 million) for the same periods ended 2011 and 2010, respectively. The increase in earned premiums in 2012 was primarily attributable to the introduction of new specialty line and aerospace programs in 2011. Earned premiums for the year ended December 31, 2011 declined due to a planned reduction in property binder business and by significant competition in direct and facultative brokered business, which began in 2010. Earned premiums for our Bermuda based operations increased to $103.5 million (on gross written premiums of $208.2 million) for the year ended December 31, 2012 from $101.5 million (on gross written premiums of $193.1 million) and $100.2 million (on gross written premiums of $176.1 million) for the same periods ended 2011 and 2010, respectively. The increase in gross written and earned premiums was primarily due to growth in our casualty and professional lines unit. Earned premiums for our Brazilian operations, which began writing premiums in 2012, were $26.6 million in earned premiums on gross written premiums of $46.8 million. Earned premiums for our U.S. operations declined slightly to $718.4 million (on gross written premiums of $957.2 million) for the year ended December 31, 2012 from $721.2 million (on gross written premiums of $913.2 million) and $822.9 million (on gross written premiums of $962.7 million) for the same periods in 2011 and 2010, respectively. The increase in gross written premiums in 2012 was the result of the introduction of new products. Additionally, we have continued to evaluate the products we have historically written and continue to exit unprofitable lines of business.
Consolidated net investment income decreased for the year ended December 31, 2012 as compared to the same periods ended 2011 and 2010 due to lower investment yields. Total invested assets at December 31, 2012 were $4,056.8 million, net of $143.9 million of invested assets attributable to Argo International’s trade capital providers. Total invested assets at December 31, 2011 were $3,985.0 million, net of $162.5 million of invested assets attributable to such trade capital providers. Total invested assets at December 31, 2010 were $4,045.0 million, net of $170.4 million of invested assets attributable to such trade capital providers.
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 net favorable loss reserve development on prior accident years. The Excess and Surplus Lines segment had $19.0 million in net favorable loss reserve development primarily in the casualty and professional liability lines of business. The Commercial Specialty segment had $9.8 million of net favorable loss reserve development primarily within 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 $16.8 million primarily attributable to short-tail non-catastrophe losses. The Syndicate 1200 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 reinsurance 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 the general liability lines resulting from asbestos and environmental exposure.
In determining appropriate reserve levels for the year ended December 31, 2012, 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. These modifications to the analysis varied depending on whether the line of business was short-tailed or long-tailed and also varied by accident year. While prior accident years’ net reserves for losses and loss adjustment expenses for some lines of business have developed favorably in recent years, this does not infer that more recent accident years’ reserves also will develop favorably; pricing, reinsurance costs, the legal environment, general economic conditions including changes in inflation and many other factors impact management’s ultimate loss estimates.
Consolidated interest expense was $23.7 million, $22.1 million and $22.9 million for the years ended December 31, 2012, 2011 and 2010, respectively. The increase in interest expense for the year ended December 31, 2012 as compared to the same period in 2011 was primarily attributable to interest being accrued for both the Senior Notes (issued in September 2012) and $118.6 million of Capital Trust Securities prior to their redemption in November 2012.
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 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 gross written premiums for the year ended December 31, 2012 as compared to the same period in 2011 was primarily attributable to increases in the property, casualty and environmental product lines. The Excess and Surplus Lines segment has introduced several new products during 2012 to drive future growth and profitability. This growth was partially offset by decreases in errors & omissions businesses as we continue to exit unprofitable lines of business. The decline in gross written premiums for the year ended December 31, 2011 as compared to the same period ended 2010 was due to the planned exit of certain unprofitable lines. The declines in earned premiums were the result of the reductions in gross written premiums in 2011 and 2010.
Included in losses and loss adjustment expenses for the year ended December 31, 2011 was $7.6 million in catastrophe losses from storm activity in the United States, including the Alabama and Joplin, Missouri tornados and Hurricane Irene. Offsetting these catastrophe losses was $33.8 million of net favorable loss reserve development on prior accident years primarily resulting from $30.2 million of favorable development in the general and products liability lines of business. The remaining net favorable development was attributable to the automobile liability, professional liability and property lines of business.
Included in losses and loss adjustment expenses for the year ended December 31, 2010 was $19.0 million in favorable loss reserve development on prior accident years within the casualty, professional liability and property lines. Included in losses and loss adjustment expenses was $4.5 million for storm losses for the 2010 accident year. Included in losses and loss adjustment expenses was $15.4 million in favorable loss reserve development on prior accident years within the casualty, professional liability and property lines.
The decline in earned premiums for the years ended December 31, 2012 and 2011 as compared to the same period ended in 2010 was primarily due to reduced writings in our retail business, public entity and commercial programs units due to a planned reduction in writings as we exited unprofitable products and implemented underwriting initiatives to increase rate. Earned premiums for our retail business unit declined from $90.8 million for the year ended December 31, 2011 to $88.5 million for the same period ended 2012. Earned premiums for our public entity unit declined from $124.1 million for the year ended December 31, 2011 to $121.2 million for the same period ended 2012. Earned premiums for our commercial programs unit declined from $17.7 million for the year ended December 31, 2011 to $14.0 million for the same period ended 2012 as we terminated a logging program. Offsetting these declines were growth in earned premiums in our surety and mining units. Earned premiums for our surety unit increased to $20.4 million for the year ended December 31, 2012 from $12.9 million for the same period ended in 2011 due to a continued focus on growing this business unit. Earned premiums for our mining products increased to $69.6 million for the year ended December 31, 2012 from $66.7 million for the same period ended 2011. Gross written premiums were favorably impacted by a $9.1 million increase in 2012 as compared to 2011 on our state funds program, the underlying risk of which is 100% ceded.
Commercial Specialty segment had net unfavorable loss reserve development on prior accident years of $8.4 million primarily driven by $16.3 million of unfavorable development in general liability due to increases in claim severity and $2.0 million of unfavorable development in short-tail lines. Partially offsetting the unfavorable reserve development was $5.9 million of favorable development in workers compensation and $3.7 million of favorable development in an assumed Directors and Officers program.
Included in losses and loss adjustment expenses for the year ended December 31, 2010 was $16.8 million in catastrophe losses from storm activity in the United States. The Commercial Specialty segment recognized $9.8 million of net 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.
The increase in the expense ratio for the years ended December 31, 2012 and 2011 as compared to the same period in 2010 was primarily attributable to the reductions in earned premiums outpacing the reductions in total underwriting expenses.
Gross written and earned premiums increased for the year ended December 31, 2012 in comparison to the same periods in 2011 and 2010 primarily as a result of the new business unit in Brazil and the addition of new offices for our excess casualty and professional lines units. Earned premiums for the property catastrophe reinsurance unit were $81.8 million for the year ended December 31, 2012 and $84.7 million for the same period in 2011. The excess casualty and professional lines unit contributed earned premiums of $17.9 million for the year ended December 31, 2012 compared with $16.4 million for the same period in 2011. Earned premiums for Brazil were $28.5 million for the year ended December 31, 2012 compared with $0 million in 2011. Earned premiums for the year ended December 31, 2011 increased in comparison to 2010 as a result of continued growth in the excess casualty and professional lines unit and an increase in property catastrophe reinstatement premium.
Losses and loss adjustment expenses for the year ended December 31, 2012 included $24.7 million in catastrophe losses from storm activity in the United States, including $23.6 million from Hurricane Sandy. In addition, International Specialty experienced $6.0 million in losses related to crop exposures. Partially offsetting these current accident year losses was $7.2 million of net favorable loss reserve development on prior accident years primarily attributable to $7.4 million of favorable
The increase in the expense ratio for 2012 and 2011 as compared to 2010 was primarily attributable to the inclusion of $19.0 million and $5.9 million, respectively, in expense for our new business units, for which minimal earned premiums were recognized. Expenses associated with these start up operations will be disproportionately higher than the rate at which premiums are earned.
The following table summarizes the results of operations for the Syndicate 1200 segment:
In 2012, we increased our direct participation in Syndicate 1200 to 79% from 69% and 61% for 2011 and 2010, respectively. For the year ended December 31, 2012, the property division wrote $253.6 million in gross written premiums, compared to $250.0 million and $257.7 million for the same periods in 2011 and 2010. Premiums written for the property division reflect the planned reduction of exposure to international treaty and direct and facultative business, as we chose to reduce our exposure in the Caribbean and international property treaty. These reductions were offset by increased writings in the real estate owned and personal accident classes. The casualty division wrote $172.5 million, $124.0 million and $127.8 million of gross written
The increase in earned premiums in 2012 as compared to 2011 is primarily attributable to the increase in gross written premiums discussed above.
Losses and loss adjustment expenses are reported net of losses ceded to the trade capital providers. Included in losses and loss adjustment expenses for the year ended December 31, 2012 was $21.2 million of catastrophe losses consisting of $18.2 million from Hurricane Sandy and $3.0 million from Hurricane Isaac. The Syndicate 1200 segment had net favorable loss development of $9.7 million 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.
The decrease in the expense ratio for the twelve months ended December 31, 2012 as compared to the same periods in 2011 and 2010 was primarily attributable to both a change in business mix and a focus on reducing acquisiton costs.
The increase in fee income, net for the year ended December 31, 2012 as compared to 2011 and 2010 was primailry attributable to a reduction in the expenses related to the generation of the fee income.
Earned premiums for the years ended December 31, 2012, 2011 and 2010 were primarily attributable to adjustments resulting from final audits, reinstatement premiums and other adjustments on policies previously written.
Losses and loss adjustment expenses for the year ended December 31, 2012 included $9.8 million in net unfavorable loss reserve development on prior accident years primarily attributable to $9.1 million of unfavorable development in general liability lines resulting from asbestos exposure. The unfavorable development was driven by increasing defense costs in the primary book of business and increasing settlement costs in the assumed book of business.
Underwriting expenses for the year ended December 31, 2012 decreased as compared to 2011 and 2010 due to reduced administrative expenses coupled with a reduction on bad debt expense in 2012. Bad debt expense, net of recoveries, on uncollectible reinsurance recoverable balances of $3.4 million and $6.0 million were included for the years ended December 31, 2011 and 2010, respectively.
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, 2012:
of our direct and assumed exposure. Management considers the indications from the various actuarial methods from that review to determine their best estimate of the asbestos and environmental loss and loss adjustment expense reserves. 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 a reconciliation of the number of asbestos and environmental claims outstanding for each of the years in the three-year period ended December 31, 2012:
The primary sources of cash flow for Argo Group and its subsidiaries are premiums, reinsurance recoverables, proceeds from sales and redemptions of investments and investment income. The primary cash outflows are claim payments, loss adjustment expenses, reinsurance costs and operating expenses. The nature of insurance is that cash collected for premiums written is
For the year ended December 31, 2012, net cash used by investing activities was $3.7 million compared to cash provided by investing activities of $102.1 million and $183.9 million for the years ended December 31, 2011 and 2010, respectively. The decrease in cash flows from investing activities in 2012 compared to 2011 was primarily a result of fewer sales of investments as the positive inflow of cash from operations combined with the excess of the proceeds from the issuance of the senior unsecured fixed rate notes assisted in meeting operational activities. The decrease in cash provided from investing activities in 2011 compared to 2010 was primarily due to fewer shares being repurchased by the Company compared to repurchases made in 2010. In 2010, cash was provided by maturities and the proceeds from the sale of investments which were used to repurchase $105.2 million of our common stock and to pay $14.2 million in dividends. As of December 31, 2012, 2011 and 2010, $234.3 million, $294.6 million and $375.3 million, respectively, of the investment portfolio were invested in short-term investments.
In September 2012, Argo Group US received an ordinary dividend in the amount of $10.0 million in cash from Rockwood Casualty Insurance Company and an ordinary dividend of $59.0 million, in the form of securities, from Colony Insurance Company.
and surplus were in excess of the minimum levels required by the Insurance Act. As of December 31, 2012, the unaudited statutory capital and surplus of Argo Re was estimated to be $1,183.9 million and the amount required to be maintained was estimated to be $312.9 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 the operating and debt service commitments, as well as other obligations.
During 2013, Argonaut Insurance Company may be permitted to pay dividends of up to $38.1 million 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 $39.1 million 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 $9.7 million 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.
On April 30, 2010, each of Argo Group International Holdings, Ltd., Argo Group US, Inc. (“Argo Group US”), Argo International Holdings Limited, and Argo Underwriting Agency Limited (the “Borrowers”) entered into a $150,000,000 Credit Agreement (“Credit Agreement”) with a syndicate of commercial banks. On July 22, 2011 the Borrowers entered into Amendment No. 2 to the Credit Agreement, which increased the revolving credit facility under the Credit Agreement from $150.0 million to $170.0 million, extended the maturity date from April 30, 2013 to April 30, 2014, and modified certain other terms. 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.
Currently, we do not have any amounts due under the $170.0 million credit facility. The credit facility allows up to $15.0 million of the facility to be used for letters of credit (“LOCs”), subject to availability under the line. Currently, we have $0.8 million in LOCs issued and outstanding under the facility.
We have two additional LOC facilities totaling $500.0 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 a previously issued facility that has since been canceled under which we still have outstanding LOCs. We no longer have the ability to issue new LOC from this facility. We must transfer eligible assets to collateral accounts prior to each respective bank issuing an LOC. Since eligible assets include fixed maturity investments, such securities need not be sold in order to qualify as eligible collateral. At December 31, 2012, we have pledged assets with a fair value of $221.5 million to support outstanding letters of credit.
agreements were $504.5 million and $262.6 million, respectively. Collateral can be provided in the form of trust accounts. As we are the beneficiary of these trust accounts only to secure future performance, these amounts are not reflected in our Consolidated Balance Sheets. Collateral provided by an insured or reinsurer may exceed or fall below their total outstanding obligation.
In September 2012, through our wholly owned subsidiary Argo Group US, we issued $143,750,000 aggregate principal amount of Argo Group US’s 6.5% Senior Notes due September 15, 2042 (the “Notes”). The Notes bear interest at 6.5%, payable quarterly in cash in arrears on the 15th day of March, June, September and December of each year, beginning on December 15, 2012. The Notes are unsecured and unsubordinated obligations of Argo Group US and rank equally in right of payment with all of Argo Group US’s other unsecured and unsubordinated debt. The Notes are guaranteed on a full and unconditional senior unsecured basis by Argo Group. The Notes may be redeemed, for cash, in whole or in part, on or after September 15, 2017, at Argo Group US’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. The proceeds, net of issuance costs, from the sale of the Notes were $138.7 million and were used to repay $118.6 million of principal related to two of our trust preferred securities, with the remainder used for general corporate purposes.
We assumed debt through the acquisition of Argo International. These notes are unsecured. All are redeemable subject to certain terms and conditions at a price up to 100% of the principal plus accrued and unpaid interest. Interest on the U.S. Dollar and Euro notes is due semiannually and quarterly, respectively. A summary of the notes outstanding at December 31, 2012 is presented below:
On February 15, 2013, our Board of Directors declared a quarterly cash dividend in the amount of $0.15 on each share of common stock outstanding. The dividend will be paid on March 15, 2013 to shareholders of record on March 1, 2013.
Our insurance and reinsurance 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, 2012, cash flow provided from operations was $30.5 million. 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 capital.
Additional information relating to our investment strategy and credit risk is included under