AnnuAl RepoRt 2012
SHareHolder inforMation
forward-looking Statements
disclosure
This report contains certain statements
that are “forward-looking statements”
within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934,
as amended. Such statements are
qualified by the inherent risks and
uncertainties surrounding future
expectations generally and also may
differ materially from actual future
experience involving any one or more
of such statements. For a more detailed
discussion of such risks and uncertainties,
see Argo Group’s filings with the SEC.
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.
Stock listing
Argo Group International Holdings, Ltd.’s
common stock trades on the NasdaqGS
under the symbol AGII.
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Questions regarding stock registration,
change of address, change of name,
or transfer should be directed to:
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Corporate office
Argo Group International Holdings, Ltd.
110 Pitts Bay Road
Pembroke HM 08
Bermuda
T. 441.296.5858
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Argo Group International Holdings, Ltd.
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Pembroke HM 08
Bermuda
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e-mail
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20
CORPORATE PROFILE
A.M. BEST rating | ‘A’ (Excellent)
ARGO GROUP | Annual Report 2012
Argo Group International Holdings, Ltd.
(NasdaqGS: AGII) is an international
underwriter of specialty insurance and
reinsurance products in areas of the
property and casualty market. Through
its operating subsidiaries, Argo Group
offers a comprehensive line of high-
quality products and services designed
to meet the unique coverage and claims-
handling needs of its clients in four
business segments. Excess & Surplus
Lines focuses on risks that the standard
(admitted) market is unwilling or unable
to underwrite because of the nature
of their businesses, their particular
risk exposures or their loss histories.
Commercial Specialty provides
standard-market property and casualty
insurance and surety coverages to highly
specialized commercial and public
entities. Our International Specialty
segment writes both insurance and
reinsurance business worldwide through
the broker market, with offerings
including specialty property catastrophe
reinsurance along with excess casualty
and professional insurance. Syndicate
1200 operates through a Lloyd’s of
London syndicate offering property
and liability coverage. Argo Group
International Holdings, Ltd.
is headquartered in Bermuda.
FINANCIAL HIGHLIGHTS
(in millions, except per share amounts)
Gross written premiums
Net written premiums
Net earned premiums
Net investment income and realized gains
Total revenue
Net income (loss)
Net income (loss) per common share:
Basis
Diluted
Combined ratio
Total assets
Shareholders’ equity
Weighted average number of shares outstanding:
Basis
Diluted
Book value per share
For the Years Ended December 31,
2012
2011 (a)
2010 (a)
$
1,745.7
$
1,544.8
$
1,527.1
1,244.5
1,186.5
144.5
1,336.3
52.3
2.05
2.01
104.6 %
$
$
$
$ 6,688.9
$
1,514.1
25.5
26.0
1,071.8
1,082.0
175.0
1,258.4
(81.9 )
(3.02)
(3.02)
119.8 %
$
$
$
$ 6,378.3
$
1,463.0
27.2
27.2
1,095.7
1,211.6
170.4
1,384.5
$
86.7
$
$
2.93
2.90
102.7%
$ 6,463.9
$ 1,609.6
29.6
29.9
$
60.75
$
55.60
$
57.82
(a) As adjusted for the retrospective application of ASU 2010-26 which modified the definition of deferred acquisition costs.
NOTICE
The financial highlights herein are a summarized version of Argo Group’s audited consolidated financial statements and do not contain
sufficient information to allow as full an understanding of the financial position, results of operations, changes in financial position
or cash flows of Argo Group as would be provided by the complete financial statements of Argo Group. A registered shareholder of
Argo Group receiving these summarized financial statements may notify Argo Group in writing that they elect to receive the complete
financial statements for the period for which the summarized financial statements are prepared, or for subsequent periods, or both.
01
LETTER TO THE
SHAREHOLDERS
After a challenging 2010 and 2011,
we began 2012 with a renewed focus
on execution; and throughout the
year, each business unit was aligned
in its attention to improving its
bottom line. While we accomplished
many of our objectives for the year,
further improvement is still needed
in certain aspects of our business.
The performance of our Commercial
Specialty segment, whose results
for 2012 were affected by significant
negative development from prior
years, was disappointing. The
economic environment across the
globe continued to pose challenges
and some of our newer ventures were
slower to gain traction than we would
have liked. And, while we’re moving
in the right direction on many fronts,
I am anxious to see the pace of that
improvement accelerate.
02
Although not satisfied with our results on
every measure, I am nonetheless pleased
with the achievements Argo Group made
on many fronts during the year. All of our
business segments are stronger than they
were a year ago and three of our four
operating segments generated growth
and underwriting profitability for the full
year. Our Syndicate at Lloyd’s and our
Excess and Surplus Lines business, in
particular, showed real improvement in
many key metrics including written
premium, loss ratio and combined ratio
– not to mention underwriting profit.
Over the course of the past year,
notwithstanding market conditions,
we made progress growing our profitable
lines of business, strengthening
relationships with key brokers and
business partners, and delivering
excellent customer service and claims
settlement. We maintained our
consistent, rigorous and disciplined
approach to underwriting and that is
making a difference in our financial
results. We acquired several new
business units, expanding our fee-based
opportunities, as well as developing
valuable new partnerships in many
business areas. The investments we made
in our international expansion over the
past few years to broaden our geographic
risk are bringing new business onto our
books as we establish our presence in
these new markets with innovative
products and superior service.
In addition to the strides we made in
attracting and retaining profitable
business, we continued our successful
efforts at improving the efficiency of our
operations. Our finance teams put much
hard work into improving the rigor in our
planning and review processes.
Colleagues in all areas and at all levels
identified and employed actions large and
small to reduce expenses. We implemented
a number of new initiatives to more
effectively manage our capital, and
we continue to fine-tune the way we
purchase reinsurance to help improve
our bottom line.
Early in the year, we officially kicked off
the development phase of a transformative
business initiative to build an end-to-end
business delivery platform to replace
our multiple legacy systems. Many of
our best and brightest Argo Group
colleagues have been actively engaged in
this endeavor; and we will begin utilizing
a portion of the new platform in 2013.
Once complete, we’ll have a single,
common, state-of-the-art system that will
streamline our internal processes, reduce
expenses and improve our flexibility and
responsiveness to customer needs and
market conditions.
In May, we took advantage of attractive
commercial lease opportunities and
relocated our U.S. home office to the
downtown San Antonio business district;
several of the photographs in this year’s
annual report were taken in that new
office. As a result of the move, we’ve
consolidated space and brought our
colleagues closer together in a state-of-
the-art environment designed to foster
greater collaboration. In June, we were
pleased to honor our own Barbara
Bufkin, who was named Insurance
Woman of the Year by the Association of
Professional Insurance Women. We pride
ourselves on the caliber of talent we
have throughout Argo Group, and it’s
always rewarding for that talent to be
acknowledged and recognized by others
in our industry.
ARGO GROUP | Annual Report 2012
We restructured our Commercial Specialty
segment to better align business units
with similar business models, most
notably by segregating our risk-bearing
business within Trident from our non-risk-
bearing business, Alteris. In doing so, we
are better positioned to leverage surplus
and augment our fee-based income
from Alteris while enabling Trident to
refocus on its core competencies and
return to the path of profitability. In
addition, we completed several program
acquisitions during the latter half of
the year to complement some of our
niche-focused offerings.
In stark contrast to the year before, the
first three quarters of 2012 were relatively
quiet in terms of catastrophe activity.
Then Hurricane Sandy did its best to make
up for that period of calm. Like all of our
competitors, we had losses but I’m very
pleased that the work that we’d done
over the past two years really made
a difference. With our revisions to
underwriting and reinsurance, the impact
of Sandy was not only consistent with our
expectations, it was about half of what
we might have seen a few years ago.
This validates the strategic changes
we had made to our risk portfolio.
And after Hurricane Sandy, Argo Group,
and in fact our entire industry, came
together to help our customers, employees
and communities deal with that storm’s
devastating aftermath. With our New York
and New Jersey offices temporarily
inaccessible, colleagues from other offices
around the U.S. pitched in to pick up
workloads without interruption to our
customers. Argo Group employees in
storm-affected areas found innovative
and resourceful ways to stay connected
and accessible to their customers.
And Argo International, our Syndicate
at Lloyd’s, was named by global insurance
broker, Willis, as the leading insurer in
handling claims resulting from Sandy
while, in addition, earning recognition
in third-party studies for their overall
improvements in claims handling.
In the latter portion of the year, we
completed a whole account quota share
reinsurance transaction for our Syndicate
business from years 2009 and prior,
freeing up capital that we can deploy
to opportunities affording better capital
returns. In addition, we achieved
long-term interest expenses saving and
ongoing accretion to our earning per
share by issuing senior retail notes and
using the proceeds to repurchase the
more expensive tranches of our
previously outstanding capital trust
securities. And during the fourth quarter,
we executed on our first sidecar vehicle,
Harambee Re, for 2013, which will afford
fee-generating opportunities with
third-party provided capital.
In combination, all of these achievements
contributed to a year-end book value per
share of $60.75, an increase of 9.3% from
the end of the previous year. We still have
a ways to go to deliver the returns we
desire but I’m confident in our strategy,
our business model and the talented team
we have on board; and I’m very optimistic
about the future prospects and successes
of our enterprise. As always, I’m grateful
for the contributions our colleagues,
partners and shareholders have made
to enable us to reach where we are today.
Thank you for your continued support.
Regards,
Mark E. Watson III
President and Chief Executive Officer
03
FINANCIAL RESULTS
2012 at a glance
,
$
6
4
6
3
.
9
$
6
,
3
7
8
.
3
$
1
,
7
4
5
.
7
$
1
,
5
2
7
.
1
$
1
,
5
4
4
8
.
,
$
6
6
8
8
9
.
.
1
1
9
8
%
1
0
4
6
%
.
1
0
2
7
%
.
$
5
7
8
0
.
$
5
5
.
6
0
$
6
0
.
7
5
2010
2011
2012
2010
2011
2012
2010
2011
2012
2010
2011
2012
Gross Written
Premiums
(dollar amounts in millions)
Total Assets
(dollar amounts in millions)
Combined Ratio
Book Value per
Share
ARGO GROUP (Consolidated)
$
5
2
2
9
.
$
5
1
3
.
5
$
4
7
8
9
.
$
4
2
8
.
1
$
4
2
8
8
.
$
4
3
7
.
0
$
2
6
0
.
2
$
2
6
0
.
2
$
1
8
8
6
.
$
1
9
8
2
.
$
5
3
3
.
4
$
4
3
8
.
5
$
3
8
9
9
.
2010
2011
2012
2010
2011
2012
2010
2011
2012
2010
2011
2012
Excess & Surplus
Lines
Commercial Specialty
International
Specialty
Syndicate 1200
GROSS WRITTEN PREMIUMS BY SEGMENTS
(dollar amounts in millions)
04
SEGMENTS
For the Years Ended December 31,
(dollar values in millions)
EXCESS & SURPLUS LINES
Gross written premiums
Earned premiums
Losses and loss adjustment expenses
Underwriting, acquisition and insurance expenses
Underwriting income
Net investment income
Interest expense
Income before income taxes
Loss ratio
Expense ratio
Combined ratio
Loss reserves at December 31
COMMERCIAL S PECIALTY
Gross written premiums
Earned premiums
Losses and loss adjustment expenses
Underwriting, acquisition and insurance expenses
Underwriting (loss) income
Net investment income
Interest expense
Fee income, net
(Loss) income before income taxes
Loss ratio
Expense ratio
Combined ratio
Loss reserves at December 31
INTERNATIONAL SPECIALTY
Gross written premiums
Earned premiums
Losses and loss adjustment expenses
Other reinsurance-related expenses
Underwriting, acquisition and insurance expenses
Underwriting income (loss)
Net investment income
Interest expense
Income (loss) before income taxes
Loss ratio
Expense ratio
Combined ratio
Loss reserves at December 31
SYNDICATE 1200
Gross written premiums
Earned premiums
Losses and loss adjustment expenses
Other reinsurance-related expenses
Underwriting, acquisition and insurance expenses
Underwriting income (loss)
Net investment income
Interest expense
Fee income, net
Income (loss) before income taxes
Loss ratio
Expense ratio
Combined ratio
Loss reserves at December 31
ARGO GROUP | Annual Report 2012
2012
2011 (a)
2010 (a)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
513.5
399.3
223.3
143.9
32.1
51.1
(9.1 )
74.1
55.9 %
36.0 %
91.9 %
1,209.0
437.0
317.5
257.0
108.3
(47.8 )
27.6
(5.9 )
1.3
(24.8 )
81.0 %
34.1 %
115.1 %
660.0
260.2
130.1
73.5
9.4
43.8
3.4
12.3
(4.4 )
11.3
60.9 %
36.2 %
97.1 %
257.3
533.4
337.9
184.0
7.5
133.9
12.5
15.3
(3.7 )
4.0
28.1
55.7 %
40.5 %
96.2 %
738.9
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
478.9
405.3
247.1
139.8
18.4
56.0
(8.5 )
65.9
61.0 %
34.5 %
95.5 %
1,271.8
428.8
316.7
236.4
106.7
(26.4 )
27.7
(5.0 )
0.1
(3.6 )
74.6 %
33.7 %
108.3 %
622.8
198.2
101. 3
149.1
—
30.8
(78.6)
10.9
(3.2 )
(70.9 )
147.1 %
30.4 %
177.5 %
237.9
438.5
259.3
222.6
—
119.0
(82.3 )
17.2
(3.2 )
1.3
(67.0 )
85.8 %
45.9 %
131.7 %
755.3
$
$
$
522.9
489.7
311.1
166.2
12.4
58.6
(6.4 )
64.6
63.5 %
33.9 %
97.4 %
$
1,338.0
$
$
$
$
$
$
$
$
$
$
$
$
428.1
332.8
221.8
104.7
6.3
29.8
(4.1 )
0.2
32.2
66.6 %
31.5 %
98.1 %
610.5
188.6
100.3
43.3
—
28.7
28.3
8.4
(3.6 )
33.1
43.1 %
28.6 %
71.7%
123.0
389.9
290.1
203.2
—
131.1
(44.2 )
14.2
(3.1 )
2.3
(30.8 )
70.0 %
45.2 %
115.2 %
623.7
05
(a) As adjusted for the retrospective application of ASU 2010-26 which modified the definition of deferred acquisition costs.
EXCESS & SURPLUS
LINES
Our Excess and Surplus Lines (E&S) segment is focused
on providing superior underwriting solutions for risks
typically not underwritten by the standard market.
Our E&S segment operates through two underwriting
platforms: Colony Specialty for property and casualty
risks and Argo Pro for professional lines risks.
Colony Specialty underwrites risks on both an admitted and
non-admitted basis through six divisions: Casualty, Contract,
Environmental, Specialty Property, Transportation and Allied
Medical. We provide coverage to a broad group of commercial
enterprises including contractors, manufacturers, distributors,
environmental consultants and contractors, real estate owners
and developers, retailers, restaurants and smaller social service
and medical facilities.
Argo Pro underwrites small to medium size professional liability
risks on both an admitted and non-admitted basis through
three divisions: Management Liability, Errors & Omissions
(E&O), and Insight. We provide coverage to a specialized group
of commercial enterprises including accountants, architects,
engineers, lawyers and providers of information technology
and services as well as select financial institutions in the middle
market and upper middle market segments.
For the past two years, we have positioned our E&S Lines
business for long-term success by transitioning the organization
to better meet the needs of our customers, increasing the
efficiencies of our operations, and improving our underwriting
profitability. We were very pleased with the strides we made
during 2012 in executing our long-term plan.
After deliberately reducing our gross written premium
in 2011 as we exited underperforming classes of business,
06
ARGO GROUP | Annual Report 2012
New York
At the intersection of Broadway and Houston
Street in the vibrant SoHo neighborhood,
Argo Group’s New York City location serves
as home base for approximately 40 associates
from various functions within the Company’s
E&S segment and corporate operations.
For 2012, gross written premiums in our E&S Lines segment
totaled $513.5 million, with pre-tax operating income of
$74.1 million. Catastrophe losses for the year totaled $12.6 million.
The combined ratio for the year improved to 91.9% while
underwriting profit improved to $32.1 million.
We were very pleased with the strides we made during
2012 in executing our long-term plan. After deliberately
reducing our gross written premium in 2011 as we
exited underperforming classes of business, we ended
2012 with strong premium growth of $34.6 million.
we ended 2012 with strong premium growth of $34.6 million.
Most importantly, that growth came from a better mix of
business as we continued to engrain an underwriting culture
focused on sustainable underwriting margin. With our emphasis
on a strong and profitable mix of business, we introduced a
number of new products including: cyber liability, environmental
auto and excess, multiyear policies and directors and officers
(D&O). We continued to refine our organizational structure
to enhance value and ease of doing business. During the year
we integrated our E&O and D&O businesses under the Argo Pro
banner and consolidated our Transportation and Contract
divisions into a single Binding platform.
Our claims team is integral to our goal of delivering outstanding
customer service and we are truly building a best-in-class claims
organization. We ended the year with a favorable claims closing
ratio of 112%, having reduced our open claims count by 1,469
files. In addition, through prudent management and oversight,
we’ve reduced our claims handling indemnity and legal
expenses, which contributed to our positive financial results
for the year.
We pride ourselves on building and maintaining long-term
and mutually beneficial partnerships with our customers.
To that end, we continued our efforts to strategically position
underwriting talent in our locations throughout the country and
to maintain frequent contact and visibility with our partners.
07
COMMERCIAL
SPECIALTY
Argo Group’s Commercial Specialty segment is
comprised of seven niche-focused divisions delivering
custom insurance products and services through a
broad distribution platform. These divisions include
providers of specialty insurance products and services -
Rockwood, Trident, Argo Insurance and ARIS; our surety
business – Argo Surety; and our programs and fee-based
divisions – Commercial Programs and Alteris. Specialty
underwriting expertise, customized insurance programs,
and expert claims handling are the hallmarks of the
divisions within our Commercial Specialty segment.
Primarily focused on distribution of products designed for small-
to medium-sized commercial risks, most of our commercial
specialty business is written through independent agents
and, to a lesser extent, regional brokers and direct writers.
We emphasize strong marketing relationships with our
distribution partners and offer a broad array of products with
clearly defined underwriting policies and competitive prices.
Our target industry sectors include: grocery stores, mining,
specialty retail, restaurants, non-construction surety products,
municipal and county government entities.
During the year, we reorganized the segment, decoupling our
risk-bearing business within Trident from our non-risk-bearing
business, Alteris. This realignment, which was completed in the
fourth quarter, will enhance shareholder value by enabling us
to better leverage surplus and augment our fee-based income.
In 2012, Alteris completed three acquisitions to add to its
offerings: John Sutak Insurance Brokers, a pioneer and leading
provider of insurance programs for the wine industry; Sonoma
Risk Insurance Agency, developer of the first and only contract
litigation insurance product available in the U.S.; and Mattei
Insurance Services, a Seattle-based program manager with niche
offerings in the logging and waste systems industries.
With our organizational realignment, Trident, previously a
division of Alteris, is returning its focus to providing insurance
solutions to municipalities and schools. Both Trident and
08
ARGO GROUP | Annual Report 2012
San Antonio
The San Antonio office, overlooking the city’s
famed River Walk, serves as the headquarters
for Argo Group’s US operations. The company’s
state-of-the-art video conference facilities
connect workers in the San Antonio office with
their colleagues throughout the world.
During the year, we reorganized the segment,
decoupling our risk-bearing business within Trident
from our non-risk-bearing business, Alteris.
This realignment will enhance shareholder value
by enabling us to better leverage surplus and augment
our fee-based income.
Argo Insurance, our insurance operation targeting the
grocery, restaurant and specialty retail sectors, faced major
re-underwriting of their portfolios during 2012 in order to return
these businesses to underwriting profitability. Both business
divisions reduced their gross written premiums for the year
while shedding underperforming business and refocusing
on their target industries and geographic regions in their areas
of differentiating expertise.
Our Rockwood division, a leading specialty underwriter of
workers compensation for the mining industry, and our Argo
Surety division both achieved profitable organic growth in 2012
in spite of an increasingly competitive marketplace. The strong
momentum achieved during the first half of 2012 was tempered
somewhat by slower coal demand, oversupply of natural gas,
continued industry consolidation and sluggish economic
conditions in the second half of the year.
Overall, our Commercial Specialty segment achieved a modest
increase in gross written premiums, closing the year with
$437 million. Unfavorable prior year loss development and
catastrophe losses from Hurricane Sandy and other storms
contributed to a pre-tax operating loss of $24.8 million and
a combined ratio of 115.1%.
09
INTERNATIONAL
SPECIALTY
Situated in key insurance markets throughout the globe,
our International Specialty segment consists of our
reinsurance business and our non-Lloyd’s international
insurance business. The segment underwrites insurance
and reinsurance risks worldwide through the broker
market, specializing in specialty property catastrophe
reinsurance, excess casualty insurance and professional
liability insurance. Divisions of our International
Specialty segment include: Argo Re and Argo Insurance –
Worldwide Casualty and Professional Lines in Bermuda,
Argo Seguros in Brazil, Argo Re (DIFC) in the U.A.E., and
ArgoGlobal SE in Malta.
Argo Re, established in 2008, is a recognized provider of
reinsurance products targeting a relatively small number
of clients with whom we’ve built a trading history. Our clients
recognize us for the market expertise and insights we provide
regarding their accounts as well as the financial security
we offer. In addition to analyzing data and written commentary,
we focus on building relationships through face-to-face
interactions with our clients, which enables us to understand
fully the nature of portfolios we protect. Each year, the number
of individual programs presented to our team has increased,
with 641 programs being assessed in 2012.
Also notable for the year was the establishment and launch
of Harambee Re, Argo Group’s first sidecar vehicle, which is
funded by third-party capital. This new venture provides capacity
of approximately 5% of premium income for specific property
portfolios that represent two of Argo Group’s core businesses:
Argo Re and Colony Specialty. Harambee Re is the first sidecar
transaction in the market to support both a reinsurance and
an insurance portfolio.
Argo Insurance’s Excess Casualty and Professional Liability Lines,
which operate through our Bermuda platform, continued to
increase market presence and increased gross written premiums
over the previous year. Argo Re (DIFC), which launched last year
in Dubai to serve the Middle East and North Africa markets,
began to establish itself as a leading underwriter in this region
10
ARGO GROUP | Annual Report 2012
Bermuda
Argo House has served as the corporate
headquarters of Argo Group since 2007.
With easy access to the numerous insurance
and reinsurance brokers and partners on the
Island, it is ideally situated on the edge of
scenic Hamilton Harbour.
Argo Insurance’s Excess Casualty and Professional
Liability Lines, which operate through our Bermuda
platform, continued to increase market presence and
increased gross written premiums over the previous year.
and we added to our underwriting team there, given the strong
interest generated in those markets. Our professional liability
business serving Continental Europe, ArgoGlobal SE, which also
launched last year, is now up and running. The management team
took a prudently cautious approach in its initial year given the
volatile economic situation in Europe and expects to fine-tune
its strategy for developing those markets in 2013.
Our insurance company in Brazil, Argo Seguros, completed its
first full year, having already built a reputation as a recognized
and differentiated player in most of our target markets. During
the year, we launched an innovative online platform targeted
to members of affinity groups. Sales through this platform have
been strong and we are seeking ways to introduce a version
of the platform in other businesses throughout the Group.
Catastrophe loss experience was significantly improved from the
previous year. Having completed a comprehensive assessment
of the volatility of our portfolio, the impact of Hurricane Sandy,
one of the costliest catastrophes to hit the U.S., was less severe
than it would have been in prior years. Catastrophe losses, net
of reinstatement premiums, totaled 19.3 million compared to
$111.9 million in 2011. The combined activity in our new business
contributed to an increase in gross written premiums, which
totaled $260.2 million compared to $198.2 million in 2011. The
combined ratio for the segment improved to 97.1% for the year.
11
SYNDICATE 1200
Within the Lloyd’s of London global franchise, our
Syndicate 1200 segment specializes in underwriting
worldwide property, specialty and non-U.S. liability
insurance under the Argo International brand.
Combining the resources of a large company with the
attitude of a small one, we take client service as a
personal commitment. We constantly seek to better
understand the needs of our clients and provide
excellent underwriting solutions and claim services
to help them achieve their ambitions.
Our underwriters are organized in four divisions to provide
deep, specialized knowledge to meet the needs of our clients.
Our property division focuses mainly on underwriting
short-tail risks with an emphasis on commercial properties
that are exposed to catastrophes and other man-made
or natural disasters. Our liability division underwrites
professional indemnity, general liability and directors and
officers insurance. Our specialty division underwrites cargo,
energy, and yachts and hull insurance while our aerospace
division underwrites space and aviation risks.
During 2012, we continued optimizing the blend of business
written by the Syndicate with a view to managing volatility,
eliminating less profitable business and improving capital
efficiency. To this end, we deemphasized certain areas of our
property portfolio, notably international property and heavy
industry exposures. At the same time, we grew our non-U.S.
liability and specialty writings to take advantage of profitable
underwriting prospects while at the same time achieving a more
diversified portfolio of business. Although market conditions
were challenging throughout the year and opportunities for
meaningful pricing increases were scarce, we achieved our
planned gross written premium goals for virtually all of our
business lines while maintaining discipline in pricing and
contract terms. This has translated into much improved loss
ratios for the business.
12
ARGO GROUP | Annual Report 2012
London
Across from the iconic Gherkin building
and just down the street from Lloyd’s of
London sits Exchequer Court, home of Argo
International. The location, in the heart of
one of the world’s most important insurance
markets, provides a convenient meeting
place for brokers and business partners from
around the world.
Our financial results for 2012 provided validation of our
strategies and efforts over recent years. While we incurred
losses in the fourth quarter resulting from Hurricane Sandy,
they were within our forecast for the year. We closed 2012
with an increase in gross written premiums of 21.6% over 2011,
a combined ratio of 96.2% and pre-tax operating income of
$28.1 million.
We continued optimizing the blend of business written
by the Syndicate with a view to managing volatility,
eliminating less profitable business and improving
capital efficiency.
We recruited additional underwriting talent to reinforce our
market profile in key lines of business; and we are also investing
in future talent through our graduate recruitment program,
which is now in its second year.
Through our ongoing achievement of greater diversification
of our portfolio, we continue to improve the capital efficiency
of our business. Towards this objective, in 2012 we completed
a whole account quota share reinsurance transaction for
business from years 2009 and prior. This transaction freed
up capital, which can now be deployed to new opportunities,
which afford better returns. It also allowed us to remove from
our books any exposure to business written by the Syndicate
under prior management and enabled our team to devote its
full time and attention to operating the business going forward.
We made demonstrable improvements in operational efficiency
during 2012 as the quality and cost-effectiveness of the
outsourcing of support functions, which occurred in 2011,
began to show a positive impact in reducing non-acquisition
costs. Our investment in the claims function yielded dividends
as marked by considerable improvements noted by third-party
studies; and we were particularly pleased to be named by
Willis as the leading insurer in handling claims resulting from
Hurricane Sandy.
13
EXECUTIVE
LEADERSHIP
BOARD OF DIRECTORS
BOARD OF DIRECTORS
SENIOR MANAGEMENT
Argo Group International Holdings, Ltd.
Argo Group US
Mark E. Watson III
Jay S. Bullock
Barbara C. Bufkin
Andrew Carrier
Michael Fusco
George Luecke
President and Chief
Executive Officer
Executive Vice
President and Chief
Financial Officer
Executive Vice
President, Business
Development
Group Chief
Underwriting Officer
Senior Vice President
and Chief Actuary
Senior Vice President
and Treasurer
Kevin J. Rehnberg
President
Excess & Surplus Lines
Louis Levinson
President
Michael Fleischer
Chief Underwriting
Officer
Commercial Specialty
Michael E. Arledge
President
Joshua C. Betz
President, Argo Surety
William T. Meisen
President, Argo
Insurance – U.S. Retail
Hilbert Schenck II
President, Alteris
John P. Yediny
President, Rockwood
Karen C. Meriwether Senior Vice President
and Chief Risk Officer
International Specialty
Farid Nagji
Anastasios Omiridis
Mark H. Rose
Senior Vice President
and Chief Information
Officer
Senior Vice President
and Chief Accounting
Officer
Senior Vice President
and Chief Investment
Officer
Andrew Carrier
President, Argo Re
Nigel Mortimer
Pedro Purm, Jr.
Managing Director,
Emerging Markets
Chief Executive Officer,
Argo Seguros
Syndicate 1200
Jeff Radke
Managing Director
Gary V. Woods
Chairman of the
Board (1) (3) (4) (5)
F. Sedgwick Browne Director (2) (3) (5)
H. Berry Cash
Director (3) (4)
Hector De Leon
Director (1) (2) (3)
Nabil N. El-Hage
Director (4)
Mural R. Josephson
Director (2)
Kathleen A. Nealon Director (2)
John R. Power, Jr.
Director (2) (3) (5)
John H. Tonelli
Director (4)
Mark E. Watson III
Director (1) (4)
(1) Member of the Executive Committee
of the Board of Directors
(2) Member of the Audit Committee
of the Board of Directors
(3) Member of the Human Resources
Committee of the Board of Directors
(4) Member of the Investment Committee
of the Board of Directors
(5) Member of the Nominating Committee
of the Board of Directors
14
ARGO GROUP | Annual Report 2012
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM ON CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Shareholders of Argo Group
International Holdings, Ltd.
We have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Argo Group International
Holdings, Ltd. (the Company) at December 31, 2012 and 2011
and the related consolidated statements of income (loss),
comprehensive income (loss), shareholders’ equity, and cash
flows for each of the three years in the period ended December
31, 2012 (not presented separately herein) and in our report
dated February 28, 2013, we expressed an unqualified opinion
on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed
consolidated financial statements as of December 31, 2012
and 2011 and for each of the three years in the period ended
December 31, 2012 (presented on pages 16 through 19) is fairly
stated, in all material respects, in relation to the consolidated
financial statements from which it has been derived.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2012, based on criteria established in
Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organization of the Treadway Commission and our
report dated February 28, 2013 (not presented separately herein)
expressed an unqualified opinion thereon.
San Antonio, Texas
February 28, 2013
15
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business. Argo Group International
Holdings, Ltd. and subsidiaries
(collectively, “we” or “Argo Group”) is
an international underwriter of specialty
insurance and reinsurance products in
the property and casualty market.
Basis of Presentation. The condensed
consolidated financial statements of
Argo Group have been prepared in
accordance with accounting principles
generally accepted in the United States
(“GAAP”). The preparation of 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 the reported amounts
of revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
The information in the Condensed
Consolidated Balance Sheets, the
Condensed Consolidated Statements of
Income (Loss) and the Condensed
Consolidated Statements of Cash Flows,
shown on pages 17 through 19, is derived
from the information in the Consolidated
Balance Sheets, the Consolidated
Statements of Income (Loss) and the
Consolidated Statements of Cash Flow
in Argo Group International Holdings,
Ltd. 2012 Form 10-K. For complete
financial statements, including notes,
please refer to the Consolidated Financial
Statements beginning on Page F-1 of Argo
Group International Holdings, Ltd. 2012
Form 10-K. See also Management’s
Discussion and Analysis of Financial
Condition and Results of Operations and
other information in the 2012 Form 10-K.
The financial statements include the
accounts and operations of Argo Group.
All material intercompany accounts and
transactions have been eliminated.
Accounting Standard Retrospectively
Adopted in 2012. In October 2010, the
Financial Accounting Standards Board
issued Accounting Standards Update
2010-26 that modified the definition of
the types of costs incurred by insurance
16
entities that can be capitalized in the
acquisition of new and renewal contracts.
To qualify for capitalization, the guidance
specifies that a cost must be directly
related to the successful acquisition of
an insurance contract. Effective January 1,
2012, we retrospectively adopted the
update. The condensed consolidated
financial statements for prior periods
have been adjusted to reflect the
adoption of this new standard. (Further
information on the impact of this
accounting standard can be found in
Argo Group’s 2012 Form 10-K in Note 1
to the Financial Statements).
Investments. Investments in fixed
maturities at December 31, 2012 and 2011
include bonds and structured securities.
Equity securities include common stocks.
Other investments consist of private
equity funds and limited partnerships.
Short-term investments consist of money
market funds, funds on deposit with
Lloyd’s as security to support the
corporate member’s capital, United
Kingdom short-term government gilts,
U.S. Treasury bills, sovereign debt and
interest-bearing cash accounts. Short-
term investments, maturing in less than
one year, are classified as investments
in the consolidated financial statements.
Goodwill and Intangible Assets.
Goodwill is the result of the purchase
prices of our business combinations being
in excess of the identified net tangible
and intangible assets. Goodwill is
recorded as an asset and is not amortized.
Intangible assets with a finite life are
amortized over the estimated useful life
of the asset. Intangible assets with an
indefinite useful life are not amortized.
Goodwill and intangible assets are tested
for impairment on an annual basis or
more frequently if events or changes in
circumstances indicate that the carrying
amount may not be recoverable. If the
goodwill or intangible asset is impaired,
it is written down to its fair value with
a corresponding expense reflected in the
Consolidated Statements of Income.
Goodwill and intangible assets are
allocated to the segment in which the
results of operations for the acquired
company are reported.
Amortization expense incurred in 2012
and 2011 associated with assets having
a finite life were $5.2 million and
$4.6 million, respectively.
Earned Premiums. Premium revenue
is recognized ratably over the policy
period, with an adjustment, where
appropriate, to reflect the risk profile
of certain classes of business particularly
those exposed to seasonal weather
related events. Premiums that have
yet to be earned are reported as
“Unearned premiums” in the Condensed
Consolidated Balance Sheets.
Reserves for Losses and Loss
Adjustment Expenses. Liabilities for
unpaid losses and loss adjustment
expenses include the accumulation
of individual case estimates for claims
reported as well as estimates of incurred
but not reported claims and estimates of
claim settlement expenses. Reinsurance
recoverables on unpaid claims and claim
expenses represent estimates of the
portion of such liabilities that will be
recoverable from reinsurers. Amounts
recoverable from reinsurers are
recognized as assets at the same time
and in a manner consistent with the
unpaid claims liabilities associated with
the reinsurance policy.
Income Taxes. Deferred tax assets and
liabilities are recognized for the estimated
future tax consequences attributable
to differences between the financial
statement carrying amounts of existing
assets and liabilities and their respective
tax bases. Deferred tax assets and
liabilities are measured using enacted tax
rates in effect for the year in which those
temporary differences are expected to
be recovered or settled. The effect on
deferred tax assets and liabilities of a
change in tax rates is recognized in net
income in the period in which the change
is enacted.
(Further information on our accounting
policies can be found in Argo Group’s
2012 Form 10-K: in the Critical Accounting
Policies section of Management’s
Discussion and Analysis and also in
Note 1 to the Financial Statements).
ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
ARGO GROUP | Annual Report 2012
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except number of shares and per share amounts)
Assets
Investments:
Fixed maturities, at fair value:
Available-for-sale (cost: 2012 - $2,993.1; 2011 - $3,095.4)
$ 3,154.0
$ 3,215.5
As of December 31,
2012
2011
(as adjusted)
Equity securities, at fair value (cost: 2012 - $383.5; 2011 - $291.5)
Other investments (cost: 2012 - $284.8; 2011 - $232.3)
Short-term investments, at fair value (cost: 2012 - $234.3; 2011 - $294.6)
Total investments
Cash
Premiums receivable and reinsurance recoverable
Goodwill and other intangibles, net of accumulated amortization
Current income taxes receivable, net
Ceded unearned premiums
Other assets
Total assets
Liabilities and Shareholders’ Equity
Reserves for losses and loss adjustment expenses
531.4
281.0
234.3
4,200.7
95.8
1,681.9
245.3
12.9
193.6
258.7
403.6
232.0
294.6
4,145.7
102.7
1,453.1
246.8
11.2
179.4
239.4
$ 6,688.9
$ 6,378.3
$
3,223.5
$
3,291.1
Unearned premiums
Ceded reinsurance payable, net
Senior unsecured fixed rate notes
Other indebtedness
Junior subordinated debentures
Deferred tax liabilities, net
Other liabilities
Total liabilities
Shareholders’ equity:
Common shares - $1.00 par, 31,384,271 and 31,285,469 shares
issued and outstanding at December 31, 2012 and 2011, respectively
Additional paid-in capital
Treasury shares (6,459,613 and 4,971,305 shares at December 31, 2012 and 2011, respectively)
Retained earnings
Accumulated other comprehensive income, net of taxes
Total shareholders’ equity
Total liabilities and shareholders’ equity
Please see accompanying “Summary of Significant Accounting Policies” on page 16.
730.2
612.1
143.8
63.8
193.3
43.8
164.3
5,174.8
31.4
722.7
(205.5 )
776.0
189.5
1,514.1
$ 6,688.9
658.2
424.5
—
65.5
311.5
18.5
146.0
4,915.3
31.3
716.8
(160.9 )
736.0
139.8
1,463.0
$
6,378.3
17
ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in millions, except number of shares and per share amounts)
Premiums and other revenue:
Earned premiums
Net investment income
Fee income, net
Net realized investment and other gains
Total revenue
Expenses:
Losses and loss adjustment expenses
Other reinsurance-related expense
Underwriting, acquisition and insurance expenses
Interest expense and other
Debt extinguishment costs
Foreign currency exchange loss (gain)
2012
For the Years Ended December 31,
2011
(as adjusted)
2010
(as adjusted)
$
1,186.5
$ 1,082.0
$
1,211.6
118.8
5.3
25.7
1,336.3
747.6
27.3
464.5
23.7
2.2
4.3
125.8
1.4
49.2
1,258.4
863.1
5.9
425.7
22.1
—
3.5
133.6
2.5
36.8
1,384.5
777.5
—
466.0
22.9
—
(3.8 )
Total expenses
1,269.6
1,320.3
1,262.6
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Net income (loss) per common share:
Basic
Diluted
66.7
14.4
52.3
2.05
2.01
$
$
$
Cash dividend declared per common share:
$
0.48
(61.9 )
20.0
$
(81.9 )
$
$
$
(3.02 )
(3.02 )
0.48
121.9
35.2
86.7
2.93
2.90
0.48
$
$
$
$
Weighted average common shares:
Basic
Diluted
25,539,991
26,044,755
27,169,132
27,169,132
29,566,004
29,935,972
Please see accompanying “Summary of Significant Accounting Policies” on page 16.
18
ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
ARGO GROUP | Annual Report 2012
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Amortization and depreciation
Share-based payments expense
Excess tax expense from share-based payments arrangements
Deferred federal income tax provision (benefit), net
Net realized investment and other gains
Gain on sale of real estate
Loss on disposal of fixed assets, net
Debt extinguishment costs
Change in:
Receivables
Reserves for losses and loss adjustment expenses
Unearned premiums
Ceded reinsurance payable and funds held
Other assets and liabilities, net
Cash provided (used) by operating activities
Cash flows from investing activities:
Sales, maturities and mandatory calls of investments
Purchases of investments
Change in short-term investments, foreign regulatory
deposits and voluntary pools
Settlements of foreign currency exchange forward contracts
Other, net
Cash (used) provided by investing activities
Cash flows from financing activities:
Proceeds from issuance of senior unsecured fixed rate notes, net
Redemption of trust preferred securities, net
Activity under stock incentive plans
Repurchase of Company’s common shares
Excess tax expense from share-based payment arrangements
Payment of cash dividend to common shareholders
Cash used by financing activities
Effect of exchange rate changes on cash
Change in cash
Cash, beginning of period
Cash, end of period
Please see accompanying “Summary of Significant Accounting Policies” on page 16.
2012
For the Years Ended December 31,
2011
(as adjusted)
2010
(as adjusted)
$
52.3
$
(81.9)
$
86.7
36.6
10.5
—
5.0
(25.7 )
—
0.3
2.2
24.9
(78.9 )
72.6
(67.5 )
(1.8 )
30.5
30.8
4.6
0.1
10.2
(49.2 )
—
1.0
—
53.6
138.9
4.1
(97.4 )
(32.5 )
(17.7 )
31.2
10.1
0.3
(3.8 )
(36.4 )
(0.4 )
0.2
—
255.8
(51.1 )
(149.5 )
(180.8 )
34.6
(3.1 )
1,613.7
(1,621.5 )
1,821.6
(1,778.4 )
2,432.7
(2,270.8 )
37.7
0.4
(34.0)
(3.7 )
138.7
(117.2 )
1.2
(44.2 )
—
(12.3)
(33.8)
0.1
(6.9)
102.7
70.1
7.7
(18.9)
102.1
—
—
1.1
(49.5 )
(0.1 )
(13.1 )
(61.6 )
(3.6 )
19.2
83.5
$
95.8
$
102.7
$
42.1
—
(20.1)
183.9
—
—
(4.3 )
(105.2)
(0.3 )
(14.2 )
(115.4 )
—
65.4
18.1
83.5
19
SHAREHOLDER INFORMATION
Forward-Looking Statements
Disclosure
This report contains certain statements
that are “forward-looking statements”
within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934,
as amended. Such statements are
qualified by the inherent risks and
uncertainties surrounding future
expectations generally and also may
differ materially from actual future
experience involving any one or more
of such statements. For a more detailed
discussion of such risks and uncertainties,
see Argo Group’s filings with the SEC.
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.
Stock Listing
Argo Group International Holdings, Ltd.’s
common stock trades on the NasdaqGS
under the symbol AGII.
Stock Transfer Agent
Questions regarding stock registration,
change of address, change of name,
or transfer should be directed to:
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
www.amstock.com
T. 800.937.5449
e-mail address: info@amstock.com
Corporate Office
Argo Group International Holdings, Ltd.
110 Pitts Bay Road
Pembroke HM 08
Bermuda
T. 441.296.5858
Internet
www.argolimited.com
Shareholder Services /
Investor Relations
Argo Group International Holdings, Ltd.
110 Pitts Bay Road
Pembroke HM 08
Bermuda
T. 441.296.5858
E-mail
IR@argolimited.com
20
SHareHolder inforMation
forward-looking Statements
disclosure
This report contains certain statements
that are “forward-looking statements”
within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934,
as amended. Such statements are
qualified by the inherent risks and
uncertainties surrounding future
expectations generally and also may
differ materially from actual future
experience involving any one or more
of such statements. For a more detailed
discussion of such risks and uncertainties,
see Argo Group’s filings with the SEC.
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.
Stock listing
Argo Group International Holdings, Ltd.’s
common stock trades on the NasdaqGS
under the symbol AGII.
Stock transfer agent
Questions regarding stock registration,
change of address, change of name,
or transfer should be directed to:
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
www.amstock.com
T. 800.937.5449
e-mail address: info@amstock.com
Corporate office
Argo Group International Holdings, Ltd.
110 Pitts Bay Road
Pembroke HM 08
Bermuda
T. 441.296.5858
internet
www.argolimited.com
Shareholder Services /
investor relations
Argo Group International Holdings, Ltd.
110 Pitts Bay Road
Pembroke HM 08
Bermuda
T. 441.296.5858
e-mail
IR@argolimited.com
20
ARGo GRoup InteRnAtIonAl HolDInGS, ltD.
110 pitts Bay Road pembroke HM 08 Bermuda
t: +1.441.296.5858 F: +1.441.296.6162
www.argolimited.com