Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion provides an analysis of the Company's financial condition, results of operations and cash flows from management's perspective and should be read in conjunction with the Consolidated Financial Statements and related notes beginning on page F-1. Our objective is to also provide discussion of events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or of future financial condition and to offer information that provides understanding of our financial condition, cash flows and results of operations.
Merger
On February 8, 2023, we entered into the Merger Agreement with Brookfield Wealth Solutions Ltd. and Merger Sub, a wholly-owned subsidiary of Brookfield Wealth Solutions Ltd. The Merger Agreement provides for the merger of the Merger Sub with and into us, which we refer to as the “Merger,” with us surviving the Merger as an indirect wholly-owned subsidiary of Brookfield Wealth Solutions Ltd.
On November 16, 2023 (“Merger Date”), we completed the Merger, which resulted in a change to the Company’s ownership.
Brookfield Wealth Solutions Ltd. elected to push-down its purchase accounting, which resulted in the Company reflecting the fair market value of its assets and liabilities as of the Merger Date, in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations. The application of push-down accounting created a new basis of accounting for all of our assets and liabilities. As such, the Company’s financial position, results of operations, and cash flows subsequent to the acquisition are not comparable with those prior to November 16, 2023, and therefore have been separated to indicate pre-acquisition and post-acquisition periods. The pre-acquisition period through November 15, 2023 is referred to as the Predecessor period. The post-acquisition period, November 16, 2023 and forward, includes the impact of push-down accounting and is referred to as the Successor period.
As a result, the following discussion regarding the results of operations of the Successor Company will be for the year ended December 31, 2024. The Successor Company will not be compared to previous periods due to the new basis of accounting it was created on, nor will it be compared to the period November 16, 2023 through December 31, 2023 (Successor) as these periods represent a full year versus forty-five days of operations, respectively.
Refer to Note 1, “Business and Significant Accounting Policies” within the Consolidated Financial Statements for additional information regarding the Merger.
For discussion of our results of operations and changes in financial conditions for the period January 1, 2023 through November 15, 2023 (Predecessor) compared to year ended December 31, 2022 and discussion for our results of operations for the period November 16, 2023 through December 31, 2023 (Successor) refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023.
Merger with AGIH Merger Sub, Inc.
On September 25, 2024, the Company and AGIH Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“AGIH Merger Sub”), entered into an Agreement and Plan of Merger, pursuant to which, among other things, AGIH Merger Sub merged with and into the Company, with the Company continuing as the surviving corporation (the “Merger with AGIH Merger Sub, Inc.”). The purpose of the Merger with AGIH Merger Sub, Inc., was to reduce the Company’s annual franchise taxes in the State of Delaware by reducing the number of authorized shares of the Company’s common stock and preferred stock. In connection with the consummation of the Merger with AGIH Merger Sub, Inc., the number of authorized shares of the Company’s common stock decreased from 2,000,000,000 to 1,000, each share of the Company’s common stock, par value $1.00 per share, of the Company was converted into and became one hundred millionth (1/100,000,000) of a validly issued, fully paid, and non-assessable share of common stock, par value $0.01 per share, of the Company, and the number of authorized shares of the Company’s preferred stock decreased from 30,000,000 to 10,000.
Forward-Looking Statements
This report includes forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as “expect,” “intend,” “plan,” “believe,” “do not believe,” “aim,” “project,” “anticipate,” “seek,” “will,” “likely,” “assume,” “estimate,” “may,” “continue,” “guidance,” “growth,” “objective,” “remain optimistic,” “improve,” “progress,” “path toward,” “outlook,” “trends,” “future,” “could,” “would,” “should,” “target,” “on track” and similar expressions of a future or forward-looking nature.
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Such statements are subject to certain risks and uncertainties that could cause actual events or results to differ materially including, but not limited to, recent changes in interest rates and inflation, the outcome of our exploration of strategic alternatives, the adequacy of our projected loss reserves, employee retention and changes in key personnel, the ability of our insurance subsidiaries to meet risk-based capital and solvency requirements, the outcome of legal and regulatory proceedings, investigations, inquiries, claims and litigation and other risks and uncertainties discussed in our filings with the SEC. For a more detailed discussion of such risks and uncertainties, see Part I, Item 1A, “Risk Factors.” The inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that the Company’s objectives will be achieved. Argo Group undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You should not place undue reliance on any such statements.
Consolidated Results of Operations (Successor)
For the year ended December 31, 2024, we reported net loss attributable to holder of common stock of $158.6 million.
The following is a comparison of selected data from our results of operations for the relevant periods:
Successor
(in millions)
For the Year Ended
Period from
December 31, 2024
November 16, 2023 through December 31, 2023
Net earned premiums
Net investment income
Net investment and other gains (losses)
Total consolidated revenues
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)
Net Earned Premiums
Consolidated net earned premiums were $1,089.8 million for the year ended December 31, 2024. The majority of net earned premiums came from our Casualty segment, with a portion coming from the Specialty segment due to a significant portion of our Specialty business being from Fronting programs.
Our gross written and earned premiums are further discussed by reporting segment below under the heading “Segment Results.”
Net Investment Income
Consolidated net investment income was $249.8 million for the year ended December 31, 2024, primarily driven by $69.0 million of accretion income from the application of purchase accounting to fixed maturities and short-term investments. Additionally, a change in investment manager and investment strategy, including increased allocations to mortgage and private loan asset classes, further contributed to increased yield in the portfolio. Additionally, the Company acquired equity securities and other investments following a shift in our investment strategy under our new investment manager.
Total invested assets were $4,094.8 million compared to $3,481.2 million at December 31, 2024 and December 31, 2023, respectively. The $613.6 million increase was primarily due to a $300.0 million capital contribution from Brookfield Wealth Solutions Ltd. in the fourth quarter of 2024, resulting in a rise in private loans.
Net Investment and Other Gains and Losses
Consolidated net investment and other gains (losses) was $20.0 million for the year ended December 31, 2024, primarily driven by net realized gains on fixed maturities and equity securities of $9.5 million and $16.7 million, respectively, offset partially by credit losses on our private loan investments. Net realized gains from the sale of fixed maturities were the result of purchase accounting adjusted book values. Equity securities gains were driven by a holding gain on a single real estate joint venture investment.
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Losses and Loss Adjustment Expense
Consolidated losses and loss adjustment expenses were $1,018.3 million for the year ended December 31, 2024.
The consolidated loss ratio was 93.4% for the year ended December 31, 2024. Net unfavorable prior year development, primarily driven by higher-than-expected loss experience in our Run-off and Casualty Lines, contributed 23.4 percentage points to our loss ratio.
Catastrophe losses of $27.2 million (2.5 percentage points) for the year ended December 31, 2024, were attributable to U.S. storms.
The following table summarizes the above referenced prior-year loss reserve development for the year ended December 31, 2024 with respect to net loss reserves by segment carried as of December 31, 2023. The net unfavorable prior-year reserve development of $254.9 million is made up of unfavorable prior year reserves development of $87.7 million in Casualty Lines, $3.1 million in Specialty Lines and $164.1 million in Run-off Lines. Our losses and loss adjustment expenses, including the prior-year loss reserve development shown in the following table, are further discussed by reporting segment under the heading “Segment Results” below.
(in millions)
Net Reserves 2023
Net Reserve
Development
(Favorable)/
Unfavorable
Percent of 2023 Net Reserves
Casualty Lines
Specialty Lines
Run-off Lines
Total
In determining appropriate reserve levels for the year ended December 31, 2024, 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. 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 imply that more recent accident years’ reserves also will develop favorably; pricing, reinsurance costs, legal environment, general economic conditions including changes in inflation and many other factors impact our ultimate loss estimates.
Consolidated gross reserves for losses and loss adjustment expenses were $5,798.6 million at December 31, 2024 as compared to $5,544.5 million at December 31, 2023. The increase was primarily driven by net unfavorable prior-year reserve development during compared to year ended 2023. Management has recorded its best estimate of loss reserves at each date based on current known facts and circumstances. Due to the significant uncertainties inherent in the estimation of loss reserves, there can be no assurance that future loss development, favorable or unfavorable, will not occur.
Underwriting, Acquisition and General Expenses
Consolidated underwriting, acquisition and general expenses were $477.0 million for the year ended December 31, 2024.
The consolidated expense ratio was 43.8% for the year ended December 31, 2024, which includes amortization expense of value of business acquired (“VOBA”) and other intangible assets.
Income Tax Provision
The consolidated income tax provision represents the income tax expense or benefit associated with our operations based on the tax laws of the jurisdictions in which we operate. Therefore, the consolidated provision for income taxes represents taxes on net income for our Ireland, Italy, U.K. and U.S. operations. The consolidated benefit for income taxes was $42.2 million for the year ended December 31, 2024. The consolidated effective tax rate was 22.2% for the year ended December 31, 2024, which was primarily aligned with statutory tax rates.
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Consolidated Results of Operations (Predecessor)
For the period January 1, 2023 through November 15, 2023 (Predecessor), we reported a net loss attributable to holders of common stock of $220.9 million ($6.28 per diluted share of common stock) as compared to a net loss attributable to holders of common stock of $185.7 million ($5.31 per diluted share of common stock) for the year ended December 31, 2022.
The following is a comparison of selected data from our results of operations, as well as book value per share of common stock, for the relevant periods:
Predecessor
Period from
For the Year Ended
(in millions)
January 1, 2023 through November 15, 2023
December 31, 2022
Gross written premiums
Net earned premiums
Net investment income
Net investment and other gains (losses):
Net realized investment and other gains (losses)
Change in fair value recognized
Change in allowance for credit losses on fixed maturity securities
Total net investment and other gains (losses)
Total revenue
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)
Less: Dividends on preferred shares
Net income (loss) attributable to common stockholders
GAAP ratios:
Loss ratio
Expense ratio
Combined ratio
The table above includes ratios in accordance with U.S. generally accepted accounting principles (“GAAP”) that we use to measure our profitability. We believe that they enhance an investor’s understanding of our profitability. They are calculated as follows:
• Loss ratio: the ratio of claims and claims expense to premiums earned. Loss ratios include the impact of catastrophe losses.
• Expense ratio: the ratio of underwriting, acquisition and general expenses to premiums earned.
• Combined ratio: the sum of the loss ratio and the expense ratio. The difference between 100% and the combined ratio represents underwriting income (loss) as a percentage of net earned premiums, or underwriting margin (loss).
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Gross Written and Net Earned Premiums
Consolidated gross written and net earned premiums by our four primary insurance lines were as follows:
Predecessor
Period from
For the Year Ended
January 1, 2023 through November 15, 2023
December 31, 2022
(in millions)
Gross Written
Net Earned
Gross Written
Net Earned
Property
Liability (1)
Professional
Specialty
Total
(1) Ceded premium in 2022 of $121.0 million for the U.S. LPT has been included in the Liability line to align with the majority of the subject reserves covered under the agreement.
Gross written premiums decreased $899.7 million, or 31.6%, for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022. The decrease in gross written premiums is primarily attributable to the sale of Argo Underwriting Agency Limited (“AUA”), Argo Seguros, and AGSE as well as businesses we have exited. Additionally, there were reductions in gross written premium in our U.S. operations primarily due to proactive actions taken in certain lines to prioritize improving profitability, partially offset by growth in several other businesses. Remaining decrease is attributable to the shortened Predecessor period.
Consolidated net earned premiums decreased $514.5 million, or 29.6%, for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022. The decrease is driven by the aforementioned reasons for gross written premiums.
Our gross written and earned premiums are further discussed by reporting segment and major lines of business below under the heading “Segment Results.”
Net Investment Income
For the period January 1, 2023 through November 15, 2023 (Predecessor), net investment income decreased $8.5 million, or 6.5%, as compared to the year ended December 31, 2022. The decrease is primarily attributable to the periods compared as a result of the Merger. Overall, compared to 2022, net investment income for the 2023 Predecessor period benefited from higher interest rates, partially offset by a decrease in income from our alternative investment portfolio which includes earnings from both private equity and hedge fund investments.
Total invested assets were $3,481.2 million compared to $3,651.9 million at December 31, 2023 and December 31, 2022, respectively. The decrease of $170.7 million is driven by post Merger push-down accounting. The Company re-classified $747.8 million of short-term investments with maturities of 90 days or less from Short-term investments to Cash, restricted cash and cash equivalents in our Consolidated Balance Sheets. The decrease due to the aforementioned re-classification was offset by an increase to our investments driven by higher interest rates.
Net Investment and Other Gains and Losses
Consolidated net investment and other losses decreased $92.6 million for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022. Consolidated net realized investment losses of $22.7 million for the period January 1, 2023 through November 15, 2023 (Predecessor), were primarily driven from the sale of AUA, which included $20.3 million of pre-tax realized losses that were previously recognized in accumulated other comprehensive income, resulting in no impact to total stockholders’ equity from this reclassification. The remaining decrease was driven by the transactions during the year ended December 31, 2022, which included consolidated net realized investment losses related to the sale of Argo Seguros and AGSE, of which $31.8 million related to historical foreign currency translation losses which were previously recognized in accumulated other comprehensive income, resulting in no impact to total stockholders’ equity from this reclassification. The Company also recognized $37.6 million of realized losses from the sale of assets transferred to Enstar as part of the U.S. LPT transaction, of which $34.2 million was an impairment recognizing losses that were previously included in accumulated other comprehensive income.
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Losses and Loss Adjustment Expense
Consolidated losses and loss adjustment expenses decreased $123.7 million, or 10.6%, for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022. The consolidated loss ratio was 85.1% for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to 67.0% for the year ended December 31, 2022. The increase in the loss ratio was driven by an increase in net unfavorable prior year development for the period January 1, 2023 through November 15, 2023 (Predecessor) as compared to 2022 (18.2 percentage points). Catastrophe losses of $28.6 million for the period January 1, 2023 through November 15, 2023 (Predecessor), were attributable to Hawaii wildfires, Tropical Storm Ophelia, Hurricane Idalia, and other U.S. storms. Catastrophe losses of $44.0 million for the year ended December 31, 2022 were attributable to Hurricane Ian, Winter Storm Elliott, the Ukraine/Russia conflict, and other small events.
Consolidated gross reserves for losses and loss adjustment expenses were $5,544.5 million at December 31, 2023 as compared to $5,051.6 million at December 31, 2022. The increase was primarily driven by net unfavorable prior-year reserve development during the period January 1, 2023 through November 15, 2023 (Predecessor) as compared to year ended 2022 and retroactive reinsurance contracts the Company entered into with AUA subsidiaries. Management has recorded its best estimate of loss reserves at each date based on current known facts and circumstances. Due to the significant uncertainties inherent in the estimation of loss reserves, there can be no assurance that future loss development, favorable or unfavorable, will not occur.
Underwriting, Acquisition and General Expenses
Consolidated underwriting, acquisition and general expenses decreased $251.7 million, or 37.5%, for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022.
The consolidated expense ratio decreased 4.4% to 34.2% for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to 38.6% the year ended December 31, 2022. This decrease is primarily driven by the change in business mix resulting from the sale of AUA, Argo Seguros and our Malta operations.
Non-Operating Expenses
Non-operating expenses represent costs not associated with our ongoing insurance or other operations, including severance expenses, certain legal costs, merger and acquisition and other transaction-related expenses, and certain non-recurring expenses. As such, non-operating expenses have been excluded from the calculation of our expense ratio. These non-recurring costs are included in the line item Non-operating expenses in the Company’s Consolidated Statements of Income (Loss).
Non-operating expenses were $41.1 million for the period January 1, 2023 through November 15, 2023 (Predecessor) and $51.5 million for the year ended December 31, 2022.
For the period January 1, 2023 through November 15, 2023 (Predecessor), our non-operating expenses consisted primarily of advisory and legal fees related to the Merger of the Company with Brookfield Reinsurance. For the year ended December 31, 2022, our non-operating expenses consisted primarily of advisory fees driven by the exploration of the Company’s strategic alternatives announced in the second quarter of 2022 and the contested proxy process.
Interest Expense
Consolidated interest expense increased $3.0 million, or 11.2%, to $29.8 million for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022. The year-over-year increase was primarily attributable to higher short-term interest rates in 2023.
Foreign Currency Exchange Gain (Loss)
Consolidated foreign currency exchange loss was $1.8 million for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to a $5.0 million foreign currency exchange gain the year ended December 31, 2022. The changes in the foreign currency exchange gains were due to fluctuations of the U.S. Dollar, on a weighted average basis, against the Canadian Dollar, Euro and the British Pound as well as disposal of several businesses transacting in foreign currencies.
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Impairment of Goodwill and Intangible Assets
As a result of the announced sale of Argo Underwriting Agency Limited and its Lloyd’s Syndicate 1200, an estimated fair value was established for Syndicate 1200 that was below its carrying value. As such, we recorded a $28.5 million impairment charge in the third quarter of 2022, consisting of $17.3 million of indefinite lived intangible assets and $11.2 million of goodwill. There were no such impairments for the period January 1, 2023 through November 15, 2023 (Predecessor).
Income Tax Provision
The consolidated income tax provision represents the income tax expense or benefit associated with our operations based on the tax laws of the jurisdictions in which we operate. Therefore, the consolidated provision for income taxes represents taxes on net income for our Ireland, Italy, U.K. and U.S. operations. The consolidated provision for income taxes was $0.3 million for the period January 1, 2023 through November 15, 2023 (Predecessor), compared to a benefit of $8.0 million for the year ended December 31, 2022. The consolidated effective tax rates were 0.1% and 4.3% for the period January 1, 2023 through November 15, 2023 (Predecessor), and year ended December 31, 2022, respectively. The primary driver for the fluctuation in the effective tax rate was a Base Erosion and Anti-Abuse Tax Liability incurred as the result of our U.S. operations entering into a loss portfolio transfer with a Bermuda related party. This liability was ultimately reversed through purchase accounting, however the impact was recorded in our income tax provision through the period ending November 15, 2023. Additionally, non-deductible compensation under Internal Revenue Code Section 162(m) also contributed to a variance in our effective tax rate. Excluding the Base Erosion and Anti-Abuse Tax Liability and non-deductible compensation adjustments, the effective tax rate for the period ending November 30, 2023 was more aligned with statutory tax rates.
Segment Results
As a result of the Company’s merger with Brookfield Wealth Solutions Ltd, and overall strategic assessment of the business, the Company changed its internal segments in a manner that caused the composition of its reporting segments to change in the fourth quarter of 2024. The Company’s reporting segments were realigned to three reportable segments—Casualty Lines, Specialty Lines, and Run-off Lines. The Company has recast all applicable Successor periods for comparability.
For additional segment information, refer to Note 15 , “Segment Information” in the Notes to the Consolidated Financial Statements.
Casualty Lines
The following table summarizes the results of operations for the Casualty Lines segment:
Successor
For the Year Ended
Period from
(in millions)
December 31, 2024
November 16, 2023 through December 31, 2023
Net earned premiums
Net investment income
Total segment revenues
Less:
Losses and loss adjustment expenses
Underwriting, acquisition and general expenses
Other segment items (1)
Segment operating income (loss)
(1) Includes interest expense and fee and other expense (income), net.
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Net Earned Premiums
Net earned premiums were $546.1 million for the year ended December 31, 2024. Premiums were primarily attributable to our casualty, construction, environmental, Rockwood and Bermuda businesses. Casualty experienced a favorable rate environment in all businesses except for Rockwood.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $432.2 million for the year ended December 31, 2024.
The loss ratio for the year ended December 31, 2024 was 79.1%. Net unfavorable prior year development, primarily driven by the recognition of higher-than-expected loss experience, mainly in our construction line of business, along with updates to the expectations for future loss experience and development for Bermuda Casualty, contributed 16.1% percentage points to our loss ratio.
Underwriting, Acquisition and General Expenses
Underwriting, acquisition and general expenses were $145.5 million for the year ended December 31, 2024. The expense ratio was 26.7% for the same period.
Specialty Lines
The following table summarizes the results of operations for the Specialty Lines segment:
Successor
For the Year Ended
Period from
(in millions)
December 31, 2024
November 16, 2023 through December 31, 2023
Net earned premiums
Net investment income
Total segment revenues
Less:
Losses and loss adjustment expenses
Underwriting, acquisition and general expenses
Other segment items (1)
Segment operating income (loss)
(1) Includes interest expense and fee and other expense (income), net.
Net Earned Premiums
Net earned premiums were $257.8 million for the year ended December 31, 2024. Premiums were primarily attributable to our property, garage, inland marine, and programs. Garage and inland marine benefited from a single-digit rate increase environment while Bermuda Property experienced single-digit declines.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $165.7 million for the year ended December 31, 2024. The loss ratio for the year ended December 31, 2024 was 64.3% and included 10.6 percentage points from catastrophe losses which were primarily attributable to U.S storms.
Underwriting, Acquisition and General Expenses
Underwriting, acquisition and general expenses were $66.2 million for the year ended December 31, 2024. The expense ratio was 25.7% for the year ended December 31, 2024.
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Run-off Lines
The following table summarizes the results of operations for the Run-off Lines segment:
Successor
For the Year Ended
Period from
(in millions)
December 31, 2024
November 16, 2023 through December 31, 2023
Net earned premiums
Net investment income
Total segment revenues
Less:
Losses and loss adjustment expenses
Underwriting, acquisition and general expenses
Other segment items (1)
Segment operating income (loss)
(1) Includes interest expense and fee and other expense (income), net.
Net Earned Premiums
Net earned premiums were $285.9 million for the year ended December 31, 2024. Premiums were primarily from professional lines, surety and public entity business.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $420.4 million for the year ended December 31, 2024.
The loss ratio for the year ended December 31, 2024 was 147.0%. Net unfavorable prior year development, primarily driven by the recognition of higher-than-expected loss experience, including U.S. and Bermuda professional lines, Trident, and assumed business from our former Malta operations sold in 2022, along with updates to the expectations for future loss experience and developments, contributed 57.4% percentage points to our loss ratio.
Underwriting, Acquisition and General Expenses
Underwriting, acquisition and general expenses were $91.0 million for the year ended December 31, 2024. The expense ratio was 31.9% for the same period.
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U.S. Operations
The following table summarizes the results of operations for the U.S. Operations segment:
Predecessor
Period from
For the Year Ended
(in millions)
January 1, 2023 through November 15, 2023
December 31, 2022
Gross written premiums
Net earned premiums
Losses and loss adjustment expenses
Underwriting, acquisition and general expenses
Underwriting income (loss) (non-GAAP)
Net investment income
Interest expense
Fee and other expense (income), net
Income (loss) before income taxes
GAAP ratios:
Loss ratio
Expense ratio
Combined ratio
The table above includes underwriting income (loss) which is an internal performance measure that we use to measure our insurance profitability. We believe underwriting income (loss) enhances an investor’s understanding of insurance operations profitability. Underwriting income (loss) is calculated as earned premiums less losses and loss adjustment expenses less underwriting, acquisition and general expenses. Although underwriting income (loss) does not replace net income (loss) computed in accordance with GAAP as a measure of profitability, management uses underwriting income (loss) to focus our reporting segments on generating operating income.
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Gross Written and Net Earned Premiums
Gross written and net earned premiums by our four primary insurance lines were as follows:
Predecessor
Period from
For the Year Ended
January 1, 2023 through November 15, 2023
December 31, 2022
(in millions)
Gross Written
Net Earned
Gross Written
Net Earned
Property
Liability (1)
Professional
Specialty
Total
(1) In 2022, ceded premium of $121.0 million for the U.S. LPT has been included in the Liability line to align with the majority of the subject reserves covered under the agreement.
Property
Gross written premiums for property decreased $5.4 million, or 2.5%, for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022 primarily as a result of the shortened Predecessor period as compared to a full year of results in 2022. The decrease in net earned premiums for the period January 1, 2023 through November 15, 2023 (Predecessor), compared to the year ended December 31, 2022 was mainly attributed to the shortened Predecessor period coupled with the sale of the contract binding and excess and surplus property businesses in 2021 partially offset by growth in the inland marine business.
Liability
Gross written premiums for liability decreased $175.4 million, or 16.3%, for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022. The decrease was mainly from reductions in the construction business unit and delegated authority programs, partially offset by growth in environmental, casualty, and workers’ compensation lines. Net earned premiums increased for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022. The increase was primarily due to ceded premium of $121.0 million for the U.S. LPT during the fourth quarter of 2022.
Professional
Gross written premiums for professional lines decreased $131.0 million, or 31.9%, for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022. The primary decrease is due to lower production in management liability and errors and omission lines, and delegated authority programs, as well as increased competition. The decrease in net earned premium for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022, was also due to the reduced production from the lines noted above.
Specialty
Gross written premiums decreased $50.0 million or 20.7%, for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022. The decrease was driven by surety, partially offset by an increase in fronted programs. The decrease in net earned premiums for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022, was primarily a result of the shortened Predecessor period coupled with a decrease in surety lines, partially offset by an increase in delegated authority programs.
Loss and Loss Adjustment Expenses
Loss and loss adjustment expenses were $935.1 million and $870.1 million for the period January 1, 2023 through November 15, 2023 (Predecessor), and year ended December 31, 2022, respectively. The loss ratios for the period January 1, 2023 through November 15, 2023 (Predecessor), and year ended December 31, 2022, were 84.9% and 72.0%, respectively. The higher loss ratio in 2023 was driven by increased net unfavorable prior-year reserve development versus 2022 (17.1 percentage points increase), an increase in catastrophe losses (0.7 percentage point increase), partially offset by a decrease in the current accident year non-catastrophe loss ratio (4.9 percentage point decrease).
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The current accident year non-catastrophe loss ratios for the period January 1, 2023 through November 15, 2023 (Predecessor), and year ended December 31, 2022, were 60.7% and 65.6%, respectively. The current accident year non-catastrophe loss ratio for the year ended December 31, 2022 included 6.0 percentage points from the one-time cost for the 2022 U.S. LPT transaction. Excluding that impact, the current accident year non-catastrophe loss ratio for the period January 1, 2023 through November 15, 2023 (Predecessor), was 1.5 percentage points higher than the year ended December 31, 2022, driven by a large loss and the impact of rate decreases in professional lines and expectations of claims inflation given current macro-economic conditions, partially offset by improved results in property lines.
Net unfavorable prior-year reserve development included in the income statement, for the period January 1, 2023 through November 15, 2023 (Predecessor), was $246.3 million (22.4 percentage points). The net unfavorable prior-year reserve development for the period January 1, 2023 through November 15, 2023 (Predecessor), primarily related to liability lines and professional lines partially offset by favorable development in specialty lines. The liability lines movement was driven by actual losses greater than expected, including the impact of large claims, and was largely due to business we have exited. The unfavorable liability lines development from ongoing businesses was driven by accident years 2020 and prior with the biggest movements in our Environmental and delegated authority programs businesses. The professional lines movement was driven by large management liability claims primarily impacting accident years 2019 through 2021 and errors and omissions business driven by actual losses greater than expected primarily impacting accident years 2020 and 2021.
The net unfavorable prior-year reserve development, for the year ended December 31, 2022 was $64.5 million (5.3 percentage points), The net unfavorable prior-year reserve development for the year ended December 31, 2022 was due to liability lines partially offset by favorable development in specialty lines.
Catastrophe losses for the period January 1, 2023 through November 15, 2023 (Predecessor) were $20.2 million (1.8 percentage points) and were mainly attributable to Tropical Storm Ophelia, Hurricane Idalia, and other U.S. storms. Catastrophe losses for the year ended December 31, 2022 were $13.2 million (1.1 percentage points) and were mainly attributable to Hurricane Ian, Winter Storm Elliott, and other U.S. storms.
Underwriting, Acquisition and General Expenses
Underwriting, acquisition and general expenses were $369.6 million for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to $432.8 million for the year ended December 31, 2022. The expense ratio decreased to 33.5% for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to 35.8% for the year ended December 31, 2022. The improvement in the ratio was mainly due to the decrease in expenses outpacing the decrease in net earned premium.
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International Operations
The following table summarizes the results of operations for the International Operations segment:
Predecessor
Period from
For the Year Ended
(in millions)
January 1, 2023 through November 15, 2023
December 31, 2022
Gross written premiums
Net earned premiums
Losses and loss adjustment expenses
Underwriting, acquisition and general expenses
Underwriting income (loss) (non-GAAP)
Net investment income
Interest expense
Fee and other expense (income), net
Income (loss) before income taxes
GAAP ratios:
Loss ratio
Expense ratio
Combined ratio
Gross Written and Net Earned Premiums
Gross written and net earned premiums by our four primary insurance lines were as follows:
Predecessor
Period from
For the Year Ended
January 1, 2023 through November 15, 2023
December 31, 2022
(in millions)
Gross Written
Net Earned
Gross Written
Net Earned
Property
Liability
Professional
Specialty
Total
Property
Gross written premiums for property decreased $66.4 million, or 34.8%, for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022. The decrease in gross written premiums was primarily due to the sale of AUA, which was partially offset by growth in our Bermuda operations which was driven mainly by favorable rate increases. Net earned premiums for property decreased for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022, mainly driven by the sale of AUA.
Liability
Gross written premiums for liability decreased $125.7 million, or 55.3%, for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022. The reduction in gross written premiums was primarily due to the sales of AUA and Argo Seguros which were partially offset by growth in Bermuda as a result of favorable rate increases and new business. Net earned premiums decreased for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022 for the aforementioned sales of AUA and Argo Seguros.
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Professional
Gross written premiums for professional lines decreased $135.2 million, or 64.8%, for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022. The decrease in gross written premiums was primarily driven by the sale of AUA. The decrease in net earned premiums for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022 was mainly due to the aforementioned reason.
Specialty
Gross written premiums decreased $210.0 million, or 75.0%, for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022. The decrease in gross written premiums was primarily driven by the sales of AUA and Argo Seguros. The decrease in net earned premiums for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to the year ended December 31, 2022 was mainly driven by the sales of AUA and Argos Seguros.
Loss and Loss Adjustment Expenses
Loss and loss adjustment expenses were $105.5 million and $293.9 million for the period January 1, 2023 through November 15, 2023 (Predecessor), and year ended December 31, 2022, respectively. The loss ratios for the period January 1, 2023 through November 15, 2023 (Predecessor), and year ended December 31, 2022, were 85.1% and 55.4%, respectively. The increase in the loss ratio was driven by net unfavorable prior-year reserve development in 2023 versus net favorable prior-year reserve development in 2022 (17.8 percentage point increase), an increase in the current accident year non-catastrophe loss ratio (10.9 percentage point increase), and an increase in catastrophe losses (1.0 percentage point increase).
The current accident year non-catastrophe loss ratios for the year ended December 31, 2023 and year ended December 31, 2022, were 61.0% and 50.1%, respectively. The loss ratio for the year ended December 31, 2023, includes a different mix of business from 2022 due to the dispositions of various businesses driven by the sale of AUA.
Net unfavorable prior-year reserve development for the period January 1, 2023 through November 15, 2023 (Predecessor), was $21.4 million (17.3 percentage points) related to professional, property, and liability lines in our Bermuda operations partially offset by favorable development in runoff Reinsurance lines. The unfavorable prior-year reserve development in our Bermuda operations was driven by reevaluations of large claims based on new information that emerged during the year including proposed settlements and estimated costs. The property movement included losses associated with catastrophes.
The net favorable prior-year reserve development for the year ended December 31, 2022 was $2.7 million (0.5 percentage points) and primarily related to favorable development in liability and specialty lines, partially offset by unfavorable development from professional lines development included large claim movements in Argo Insurance Bermuda.
Catastrophe losses for the period from January 1, 2023 through November 15, 2023 (Predecessor), was $8.4 million (6.8 percentage points) due to Hawaii wildfires, Hurricane Idalia, Tropical Storm Ophelia and other U.S. storms. Catastrophe losses for the year ended December 31, 2022 were $30.8 million (5.8 percentage points) due to Hurricane Ian, Winter storm Elliott, and the Ukraine-Russia conflict.
Underwriting, Acquisition and General Expenses
Underwriting, acquisition and general expenses decreased to $26.0 million for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to $205.3 million for the year ended December 31, 2022. The expense ratio decreased to 20.9% for the period January 1, 2023 through November 15, 2023 (Predecessor), as compared to 38.7% for the year ended December 31, 2022. The acquisition expense amount and ratio decrease are driven by the sale of AUA as well as reduced expenses incurred from business lines we have exited.
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Run-off Lines
The following table summarizes the results of operations for the Run-off Lines segment:
Predecessor
Period from
For the Year Ended
(in millions)
January 1, 2023 through November 15, 2023
December 31, 2022
Net earned premiums
Losses and loss adjustment expenses
Underwriting, acquisition and general expenses
Underwriting income (loss)
Net investment income
Interest expense
(Loss) income before income taxes
Run-off Lines includes liabilities associated with other liability policies that were issued in the 1960s, 1970s and into the 1980s, as well as the former risk-management business and other business no longer underwritten. Through our subsidiary Argonaut Insurance Company (“Argonaut”), we are exposed to asbestos liability at the primary level through claims filed against our direct insureds, as well as through its position as a reinsurer of other primary carriers. Argonaut has direct liability arising primarily from policies issued from the 1960s to the early 1980s, which pre-dated policy contract wording that excluded asbestos exposure. The majority of the direct policies were issued on behalf of small contractors or construction companies. We believe that the frequency and severity of asbestos claims for such insureds is typically less than that experienced for large, industrial manufacturing and distribution concerns.
Argonaut assumed risk as a reinsurer, primarily for the period 1970 to 1975, a portion of which was assumed from the London market. Argonaut also reinsured risks on policies written by domestic carriers. Such reinsurance typically provided coverage for limits attaching at a relatively high level, which are payable only after other layers of reinsurance are exhausted. Some of the claims now being filed on policies reinsured by Argonaut are on behalf of claimants who may have been exposed at some time to asbestos incorporated into buildings they occupied, but have no apparent medical problems resulting from such exposure. Additionally, lawsuits are being brought against businesses that were not directly involved in the manufacture or installation of materials containing asbestos. We believe that a significant portion of claims generated out of this population of claimants may result in incurred losses generally lower than the asbestos claims filed over the past decade and could be below the attachment level of Argonaut.
Losses and Loss Adjustment Expenses
The following table represents a roll forward of total gross and net loss reserves for the asbestos and environmental exposures in our Run-off Lines, along with the ending balances of all other reserves within Run-off Lines. Amounts in the net column are reduced by reinsurance recoverables.
Predecessor
Period from
For the Years Ended December 31,
January 1, 2023 through November 15, 2023
(in millions)
Gross
Net
Gross
Net
Asbestos and environmental:
Loss reserves, beginning of the year
Incurred losses
Losses paid
Loss reserves - asbestos and environmental, end of period
Risk-management reserves
Run-off reinsurance reserves
Other run-off lines
Total loss reserves - Run-off Lines
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Losses and loss adjustment expenses for the period January 1, 2023 through November 15, 2023 (Predecessor), included $0.2 million of net unfavorable loss reserve development on prior accident years. The unfavorable prior year loss development was due to $7.5 million in asbestos and environmental lines partially offset by $7.3 million net favorable loss reserve development in risk-management business and run-off liability losses excluding asbestos and environmental. The increase in asbestos and environmental was driven by a large asbestos settlement and changes in estimates on individual asbestos and environmental claims. The decrease in risk-management business was due to workers compensation actual incurred losses lower than expected.
Loss and loss adjustment expenses for the year ended December 31, 2022, included $2.9 million of net unfavorable loss reserve development on prior accident years. The unfavorable prior year loss development was due to $10.5 million in asbestos and environmental lines partially offset by $8.3 million net favorable loss reserve development in run-off liability losses excluding asbestos and environmental. The movement on asbestos and environmental lines was due to higher than expected loss activity and movement on large claims alleging environmental losses. The movement on liability exposures excluding asbestos and environmental was due to analysis of individual claims.
The following table represents the components of gross loss reserves for the Run-off Lines:
Predecessor
For the Year Ended
(in millions)
December 31, 2022
Asbestos:
Direct
Case reserves
Unallocated loss adjustment expense
Incurred but not reported
Total direct written reserves
Assumed domestic
Case reserves
Unallocated loss adjustment expense
Incurred but not reported
Total assumed domestic reserves
Assumed London
Case reserves
Incurred but not reported
Total assumed London reserves
Total asbestos reserves
Environmental reserves
Risk-management reserves
Run-off reinsurance reserves
Other run-off lines
Total loss reserves - Run-off Lines
We perform an extensive actuarial analysis of the asbestos and environmental reserves on at least an annual basis. We continually monitor the status of the claims and may make adjustments outside the annual review period. The review entails a detailed analysis of our direct and assumed exposure. We consider the indications from the various actuarial methods from the review to determine our best estimate of the asbestos and environmental losses and loss adjustment expense reserves. We 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 IBNR losses 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 our opinion best reflect our liabilities based upon the insurance policies issued.
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Because of the types of coverage within the Run-off Lines of business still being serviced by Argonaut, a significant amount of subjectivity and uncertainty exists in establishing the reserves for losses and loss adjustment expenses. Factors that increase these uncertainties are: (1) lack of historical data, (2) inapplicability of standard actuarial projection techniques, (3) uncertainties regarding ultimate claim costs, (4) coverage interpretations and (5) the judicial, statutory and regulatory environments under which these claims may ultimately be resolved. Significant uncertainty remains as to our ultimate liability due to the potentially long waiting period between exposure and emergence of any bodily injury or property damage and the resulting potential for involvement of multiple policy periods for individual claims. Due to these uncertainties, the current trends may not be indicative of future results. Although we have determined and recorded our best estimate of the reserves for losses and loss adjustment expenses for Run-off Lines, current judicial and legislative decisions continue to broaden liability, expand the scope of coverage and increase the severity of claims payments. As a result of these and other recent developments, the uncertainties inherent in estimating ultimate loss reserves are heightened, further complicating the already complex process of determining loss reserves. The industry as a whole is involved in extensive litigation over coverages and liability issues continue to make it difficult to quantify these exposures.
Underwriting, Acquisition and General Expenses
Underwriting, acquisition and general expenses for the Run-off Lines segment consists primarily of administrative expenses.
Liquidity and Capital Resources
Our insurance and reinsurance subsidiaries require liquidity and adequate capital to meet ongoing obligations to policyholders and claimants and fund operating expenses. For the year ended December 31, 2024, the cash flow used in operations was $144.7 million. We believe our liquidity generated from operations and, if required, from our investment portfolio, will be sufficient to meet our future obligations. We believe we have access to various sources of liquidity including cash, investments and the ability to borrow under our revolving credit facility.
Cash Flows
The Company’s future cash flows largely depend on the availability of dividends or other statutorily permissible payments from subsidiaries. The ability to pay such dividends is limited by the applicable laws and regulations of the various countries and states in which these subsidiaries operate, including, among others, Bermuda.
The primary sources of our cash inflows are premiums, reinsurance recoveries, proceeds from sales and redemptions of investments and investment income. The primary cash outflows are claim payments, loss adjustment expenses, reinsurance costs, underwriting, acquisition and overhead expenses, interest expense, purchases of investments, payment of preferred dividends and income taxes. Management believes that cash inflows are sufficient to cover cash outflows in the foreseeable future. We have access to additional sources of liquidity should the need for additional cash arise.
Cash provided by operating activities can fluctuate due to timing differences in the collection of premiums and reinsurance recoveries and the payment of losses and expenses. For the year ended December 31, 2024, cash used in operating activities was $144.7 million. Net cash used in operating activities in 2024 was primarily driven by the reinsurance payments and recoveries, claim payments and premium cash receipts. The change in premium is a result of a strategic reassessment of our various lines of business. For the period November 16, 2023 through December 31, 2023 (Successor) and January 1, 2023 through November 15, 2023 (Predecessor), cash provided by operating activities was $16.9 million and $293.7 million, respectively.
For the year ended December 31, 2024 net cash used in investing activities was $192.0 million. Net cash used in investing activities in 2024 was primarily driven by purchases of short-term investments, private loan investments, mortgage loans, and other investments offset by net proceeds from fixed maturities investments. For the period November 16, 2023 through December 31, 2023 (Successor), net cash provided by investing activities was $61.8 million. For the period January 1, 2023 through November 15, 2023 (Predecessor), net cash used in investing activities was $359.7 million.
For the year ended December 31, 2024, net cash provided by financing activities was $189.5 million. Net cash provided by financing activities in 2024 was primarily driven by the issuance of our common shares to Brookfield Wealth Solutions Ltd. There was no financing activities for the period November 16, 2023 through December 31, 2023 (Successor). For the period January 1, 2023 through November 15, 2023 (Predecessor), net cash used in financing was $9.5 million.
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We invest excess cash in a variety of investment securities. As of December 31, 2024, our investment portfolio consisted of 50.5% fixed maturities, 5.1% mortgage loans, 14.0% private loans, 10.1% equity securities, 14.1% other investments and 6.2% short-term investments (based on fair value) compared to 74.3% fixed maturities, 4.2% mortgage loans, 0.3% equity securities, 8.9% other investments and 12.3% short-term investments as of December 31, 2023. 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 stockholders’ equity. At December 31, 2024, no investments were designated as trading.
Reinsurance and Collateral Held by Argo Group
We maintain a comprehensive reinsurance program at levels management considers adequate to diversify risk and safeguard our financial position. Increases in the costs of this program, or the failure of our reinsurers to meet their obligations in a timely fashion, may have a negative impact on liquidity.
Under certain insurance programs (i.e., large deductible programs and surety bonds) and various reinsurance agreements, collateral and letters of credit (“LOCs”) are held for our benefit to secure performance of insureds and reinsurers in meeting their obligations. At December 31, 2024, the amount of such collateral and LOCs held under insurance and reinsurance agreements was $698.9 million and $1,157.9 million respectively. Collateral can also 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 the amount of their total outstanding obligation.
On November 9, 2022, the Company closed on the U.S. LPT with Enstar covering a majority of the Company’s U.S. casualty insurance reserves, including construction, for accident years 2011 to 2019. On the closing date, the Company transferred cash and investments to Enstar, a portion of which was deposited into a trust established to secure Enstar’s claim payment obligation to the Company. As such, our reinsurance recoverable with Enstar is fully collateralized.
LOCs have been filed with Lloyd’s by trade capital providers as part of the terms of whole account quota share reinsurance contracts entered into by the trade capital providers. In the event such LOCs are funded, the outstanding balance would be the responsibility of the trade capital providers. The Company sold its AUA business in February 2023.
Holding Company and Intercompany Dividends
Argo Group and its other non-insurance company subsidiaries are dependent on dividends and other permitted payments from their insurance subsidiaries in order to pay cash dividends to their stockholders, for debt service and for their operating expenses. The ability of our insurance subsidiaries to pay dividends is subject to certain restrictions imposed by the jurisdictions of domicile that regulate these subsidiaries and each jurisdiction has calculations for the amount of dividends that our subsidiary can pay without the approval of the insurance regulator.
Argo Re is the primary direct subsidiary of Argo Group International Holdings, Inc. and is subject to Bermuda insurance laws. Argo Ireland is indirectly owned by Argo Re and is a mid-level holding company subject to Irish laws, and its primary subsidiary is Argo Group U.S. Argo Group U.S. is a mid-level holding company subject to Delaware laws. Argo Group U.S. is the parent of all of our U.S. insurance subsidiaries.
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, 2024, the statutory capital and surplus of Argo Re was $1,513.6 million, and the amount required to be maintained was $100.0 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 2024, Argo Group International Holdings, Inc. received a dividend of $30.0 million from Argo Re, Argo Re received a dividend of $10.6 million from Argo International Holdings Limited (“AIH”).
During 2025, Argo Group U.S. may be permitted to receive dividends from Argonaut up to $149.8 million without prior approval from the Nebraska Department of Insurance. Argo Group U.S. is permitted to receive dividends from Rockwood of up to $18.9 million, subject to prior approval from the Pennsylvania Department of Insurance. Effective November 26, 2025—two years following the merger with Brookfield Wealth Solutions Ltd.—Rockwood’s dividends will not be subject to this prior approval. Business and regulatory considerations may impact the amount of dividends actually paid and prior approval of dividend payments may be required.
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Revolving Credit Facility and Term Loan
On November 2, 2018, each of Argo Group, Argo Group U.S., AIH, and AUA, collectively (the “Borrowers”) entered into a $325 million credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement includes a one-time borrowing of $125 million for a term loan (the “Term Loan”), and a $200 million revolving credit facility. The Company used most of the net proceeds from the Preferred Stock Offering (as defined in Note 10, “Stockholders’ Equity” of Argo Group’s 2022 Form 10-K) to pay off the Term Loan in September 2020. The Credit Agreement was subsequently amended to increase the revolving credit facility amount to $220 million, and to provide the removal of AIH and AUA as Borrowers upon the sale of AIH and AUA, which occurred on February 2, 2023.
During July 2023, the Credit Agreement was amended to permit the acquisition of Argo Group by Brookfield Wealth Solutions Ltd. pursuant to the Merger Agreement and extend the maturity date of certain commitments under the revolving credit facility from November 2, 2023 to November 2, 2024. The Credit Agreement decreased from $220 million to $200 million effective November 2, 2023.
On February 21, 2024, the Company entered into Amendment No. 6 (“Amendment No. 6”) of the Credit Agreement with the financial institutions party thereto as lenders and JPMorgan Chase Bank, N.A., individually as a lender and as administrative agent (the “Credit Agreement”). Amendment No. 6, among other things, replaced the minimum Tangible Net Worth covenant in the Credit Agreement with a minimum Consolidated Net Worth. The Consolidated Net Worth covenant is tested at the end of each fiscal quarter and has been set at an amount equal to the sum of (i) $872.0 million plus (ii) 50% of positive net income for each fiscal quarter ending after December 31, 2023 plus (iii) 50% of net proceeds received from the issuance and sale of certain equity interests after December 31, 2023.
On February 22, 2024, the Company borrowed $100.0 million from the revolving credit facility and elected a one-month term and interest option, under the terms of the Credit Agreement. The loan had been renewed using the one-month option until May 29, 2024, when the Company repaid the $100.0 million borrowed under the revolving credit facility. The facility was subsequently terminated on June 4, 2024. On June 4, 2024, the Company was named as a party under Brookfield Wealth Solutions Ltd.’s $1.2 billion revolving credit facility.
Senior Notes
In September 2012, Argo Group (the “Parent Guarantor”), through its subsidiary Argo Group U.S. (the “Subsidiary Issuer”), issued $143.8 million aggregate principal amount of the Subsidiary Issuer’s 6.5% Senior Notes due September 15, 2042 (the “Notes”). The Notes are unsecured and unsubordinated obligations of the Subsidiary Issuer and rank equally in right of payment with all of the Subsidiary Issuer’s other unsecured and unsubordinated debt. The Notes are guaranteed on a full and unconditional senior unsecured basis by the Parent Guarantor. The Notes may be redeemed, for cash, in whole or in part at the Subsidiary Issuer’s option, at any time and from time to time, prior to maturity at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued but unpaid interest on the principal amount being redeemed to, but not including, the redemption date.
Trust Preferred Securities
Through a series of trusts, that are wholly-owned subsidiaries (non-consolidated), we issued trust preferred securities. The interest on the underlying debentures is variable with the rates being reset quarterly and subject to certain interest rate ceilings. Interest payments are payable quarterly. The debentures are all unsecured and are subordinated to other indebtedness. All are redeemable subject to certain terms and conditions at a price equal to 100% of the principal plus accrued and unpaid interest.
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A summary of our outstanding junior subordinated debentures at December 31, 2024 is presented below:
(in millions)
Issue Date
Trust Preferred Pools
Maturity
Rate Structure
Interest Rate at December 31, 2024
Par Amount
Argo Group
PXRE Capital Statutory Trust II
3M SOFR + TSA + 4.10%
PXRE Capital Trust VI
3M SOFR + TSA + 3.90%
Argo Group U.S.
Argonaut Group Statutory Trust I
3M SOFR + TSA + 4.10%
Argonaut Group Statutory Trust III
3M SOFR + TSA + 4.10%
Argonaut Group Statutory Trust IV
3M SOFR + TSA + 3.85%
Argonaut Group Statutory Trust V
3M SOFR + TSA + 3.85%
Argonaut Group Statutory Trust VI
3M SOFR + TSA + 3.80%
Argonaut Group Statutory Trust VII
3M SOFR + TSA + 3.60%
Argonaut Group Statutory Trust VIII
3M SOFR + TSA + 3.55%
Argonaut Group Statutory Trust IX
3M SOFR + TSA + 3.60%
Argonaut Group Statutory Trust X
3M SOFR + TSA + 3.40%
Less: fair value adjustment
Total Outstanding
Subordinated Debentures
Unsecured junior subordinated debentures with a principal balance of $91.8 million were assumed through a previous acquisition (“the acquired debt”). The acquired debt is carried on our Consolidated Balance Sheets at $81.2 million, which represents the debt’s fair value at the Merger Date plus accumulated accretion of discount to par value, as required by accounting for business combinations under ASC 805. At December 31, 2024, the acquired debt was eligible for redemption at par. Interest accrues on the acquired debt based on a variable rate, which is reset quarterly. Interest payments are payable quarterly. A summary of the terms of the acquired debt outstanding at December 31, 2024 is presented below:
(in millions)
Issue Date
Maturity
Rate Structure
Interest Rate at December 31, 2024
Principal at December 31, 2024
Carrying Value at December 31, 2024
3M SOFR + TSA + 3.15%
Letter of Credit Facilities - Argo Re
Argo Re may be required to secure its obligations under various reinsurance contracts in certain circumstances. In order to satisfy these requirements, Argo Re has entered into one committed and one uncommitted secured bilateral LOC facility with commercial banks and generally uses these facilities to issue LOCs in support of non-admitted reinsurance obligations in the U.S. and other jurisdictions. The committed LOC facility has a term of one year and includes customary conditions and event of default provisions. The issuance of LOCs using the uncommitted LOC facility is at the discretion of the lenders. The availability of letters of credit under these secured facilities are subject to a borrowing base requirement, determined on the basis of specified percentages of the market value of eligible categories of securities pledged to the lender. On December 31, 2024, committed and uncommitted LOC facilities totaled $110.0 million.
On December 31, 2024, LOCs totaling $31.2 million were outstanding, of which $19.4 million were issued against the committed secured bilateral LOC facility and $11.9 million were issued against the uncommitted, secured bilateral LOC facility. Collateral with a market value of $40.1 million was pledged to these banks as security against these LOCs.
In addition to the bilateral, secured letters of credit facilities described above, Argo Re can use other forms of collateral to secure these reinsurance obligations including trust accounts, cash deposits, and LOCs issued by commercial banks on an uncommitted basis.
Other Letters of Credit
Other LOCs issued and outstanding on December 31, 2024 were $4.1 million.
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Preferred Stock Offering
On July 9, 2020, the Company issued 6,000 shares of its preferred stock (equivalent to 6,000,000 depositary shares, each representing a 1/1,000th interest in a share of preferred stock) with a $25,000 liquidation preference per share (equivalent to $25 per depositary share) (the “Preferred Stock Offering”).
Net proceeds from the sale of the depositary shares were approximately $144 million after deducting underwriting discounts and estimated offering expenses payable by the Company. The Company used most of the net proceeds to repay its term loan, which had $125 million principal outstanding, and used the remainder of the proceeds for working capital to support continued growth in insurance operations.
Dividends to the holders of preferred stock will be payable on a non-cumulative basis only when, as and if declared by our Board or a duly authorized committee thereof, quarterly in arrears on the 15th of March, June, September, and December of each year, commencing on September 15, 2020, at a rate equal to 7.00% of the liquidation preference per annum (equivalent to $1,750 per share of preferred stock and $1.75 per depositary share per annum) up to but excluding September 15, 2025. Beginning on September 15, 2025, any such dividends will be payable on a non-cumulative basis, only when, as and if declared by our Board or a duly authorized committee thereof, during each reset period, at a rate per annum equal to the Five-Year U.S. Treasury Rate as of the most recent reset dividend determination date (as described in the Company’s prospectus supplement dated July 7, 2020) plus 6.712% of the liquidation preference per annum.
For the year ended December 31, 2024, the Board declared quarterly dividends in the aggregate amount of $1,750 per share of preferred stock. For the year ended December 31, 2024 we paid cash dividends totaling $10.5 million to our holders of preferred stock.
Argo Group Common Stock and Dividends
On February 8, 2023, the Company entered into the Merger Agreement with Brookfield Wealth Solutions Ltd. and Merger Sub. As part of the Merger Agreement, the Company has agreed to suspend any dividends that would otherwise be declared and paid on the Company’s stock during the period from the date of the Merger Agreement through the earlier of the closing of the transaction or the termination of the Merger Agreement.
As of the Merger Date, pursuant to the Merger Agreement, each share of common stock of the Company issued and outstanding immediately prior to the Merger was automatically canceled and converted into the right to receive an amount in cash equal to $30.00.
As a result of the Merger, the Company’s new authorized share capital is 2,000,000,000 shares of common stock with a par value of $1.00 per share. All outstanding shares of common stock are owned by BNRE Triangle Acquisition Inc.
Capital Contribution
On February 20, 2024, Brookfield Wealth Solutions Ltd. made a $100.0 million capital contribution to the Company in exchange for the issuance of 100,000,000 shares of the Company’s common stock.
On February 23, 2024, the Company made a $100.0 million capital contribution to Argo Re for the ultimate benefit of Argonaut.
On May 28, 2024, Brookfield Wealth Solutions Ltd. made another $100.0 million capital contribution to the Company in exchange for the issuance of 100,000,000 shares of the Company’s common stock.
On December 1, 2024, Argo Group U.S. made a $293.0 million capital contribution to BP&C Shared Services, Inc. (formerly known as Argonaut Management Services, Inc,).
On December 23, 2024, Brookfield Wealth Solutions Ltd. made another $300.0 million capital contribution in the form of contributed loans to the Company for the ultimate benefit of the Company’s insurance company subsidiaries.
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Cash Obligations and Commitments
Our estimated contractual obligations and commitments as of December 31, 2024 were as follows:
Payments Due by Period
(in millions)
Total
Less Than 1
Year
1 - 3 Years
Thereafter
Long-term debt:
Junior subordinated debentures (1)
Senior unsecured fixed rate notes (2)
Operating leases
Purchase obligations (3)
Other long-term liabilities:
Claim payments (4)
Partnership commitments (5)
Total contractual obligations
(1) Interest only on Junior Subordinated Debentures through 2037. Interest calculated based on the rate in effect at December 31, 2024. Principal due beginning May 2033.
(2) Interest only on Senior Unsecured Fixed Rate Notes through 2042. Interest calculated based on the rate in effect at December 31, 2024. Principal due September 2042.
(3) Purchase obligations consist primarily of software, hardware and equipment servicing and software licensing fees.
(4) Claim payments do not have a contractual maturity; exact timing of claim payments cannot be predicted with certainty. The above table estimates timing of claim payments based on historical payment patterns and excludes the benefits of reinsurance recoveries.
(5) Argo Group has invested in multiple limited partnership agreements and can be called to fulfill the obligations at any time.
Supplemental Guarantor Financial Information
In September 2012, the Parent Guarantor, through its Subsidiary Issuer, issued $143.8 million aggregate principal amount of the Subsidiary Issuer’s 6.5% Senior Notes due September 15, 2042 (the “Notes”). The Notes are unsecured and unsubordinated obligations of the Subsidiary Issuer and rank equally in right of payment with all of the Subsidiary Issuer’s other unsecured and unsubordinated debt. The Notes are guaranteed on a full and unconditional senior unsecured basis by the Parent Guarantor. The Notes may be redeemed, for cash, in whole or in part at the Subsidiary Issuer’s option, at any time and from time to time, prior to maturity at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued but unpaid interest on the principal amount being redeemed to, but not including, the redemption date. The Company’s ability to repay the Notes largely depends on the availability of dividends or other statutorily permissible payments from subsidiaries.
This summarized financial information has been prepared in accordance with Regulation S-X Rule 13-01, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and is not intended to present the financial position or results of operations of the obligor group in accordance with U.S. GAAP.
The following tables present summarized financial information related to the Senior Notes issued by Argo Group U.S. (the “Subsidiary Issuer") and the Company (the “Parent Guarantor”) on a combined basis after elimination of (i) intercompany transactions and balances among the Parent Guarantor and the Subsidiary Issuer, (ii) equity in undistributed earnings from and investments in any other subsidiaries that are non-obligor group, and (iii) amounts due to, amounts due from, and transactions with (1) non-obligor subsidiaries and (2) affiliates are separately disclosed, as applicable. Obligor group consists of the Subsidiary Issuer and the Parent Guarantor.
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Argo Group International Holdings, Inc. Obligor Group
Balance Sheet Information
(in millions)
December 31, 2024
Total assets (1)
Total liabilities (2)
Series A Preferred stock
(1) Includes $21.8 million of investments, $5.5 million of cash, restricted cash and cash equivalents, and $5.3 million of deferred tax assets, net
(2) Includes $1.5 million and $60.4 million of due to (from) affiliates and intercompany notes payable, respectively, $290.8 million of debt, and $8.5 million of accrued underwriting expenses and other liabilities
Income Statement Information
For the Year Ended
(in millions)
December 31, 2024
Total revenue (1)
Total expenses (2)
Net income (loss)
Dividends on Series A Preferred stock
Net income (loss) attributable to common stockholders
(1) Includes $0.9 million of net investment income
(2) Includes interest expense of $33.1 million
Recent Accounting Pronouncements
ASU 2023-07 – On November 27, 2023, the FASB issued Accounting Standards Update 2023-07— Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . The amendments require the disclosure of significant segment expenses by reportable segment, enhance interim and annual disclosure requirements, and clarify circumstances in which an entity can disclose multiple segment measures of profit or loss. This ASU was effective on January 1, 2024 for annual filings (and January 1, 2025 for quarterly filings) and was applied retrospectively to all prior periods presented in our consolidated financial statements for the Successor periods. As a result of adopting this ASU, we added additional information in Note 15 , “Segment Information,” in the Notes to Consolidated Financial Statements.
ASU 2023-09 – On December 14, 2023, the FASB issued Accounting Standards Update 2023-09— Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments improve income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures.
The amendments in ASU 2023-09 are effective for fiscal years beginning after December 15, 2024. Early adoption is permitted.
We are currently evaluating the requirements of ASU 2023-09. However, as they apply to disclosure requirements, the adoption of the standard is not anticipated to have a material impact on our profitability, financial position or cash flows.
ASU 2024-03 – On November 4, 2024, the FASB issued Accounting Standards Update 2024-03— Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40) : Disaggregation of Income Statement Expenses , to improve interim and annual disclosures about a public business entity’s expenses by requiring more detailed information in the notes to the financial statements about certain expense categories, including purchases of inventory, employee compensation, depreciation, amortization, and selling expenses. We expect to adopt this ASU effective January 1, 2027 and the adoption will not affect our financial position or our results of operations, but will result in additional disclosures.
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Critical Accounting Estimates
Reserves for Losses and Loss Adjustment Expenses
We establish reserves for the estimated total unpaid costs of losses including loss adjustment expenses (“LAE”), for claims that have been reported as well as claims that have been incurred but not yet reported. Unless otherwise specified below, the term “loss reserves” encompasses reserves for both losses and LAE. Loss reserves reflect management’s best estimate. Loss reserves established are not an exact calculation of our liability. Rather, loss reserves represent management’s best estimate of our liability based on application of actuarial techniques and other projection methodologies and taking into consideration other facts and circumstances known at the balance sheet date. The process of establishing loss reserves is complex and necessarily imprecise, as it involves using judgment that is impacted by many internal and external variables such as past loss experience, current claim trends and the prevailing social, economic and legal environments. In determining loss reserves, we give careful consideration to all available data and applicable actuarial analyses including expected loss ratios, loss development factors, settlement patterns and the weighting of actuarial methodologies.
The relevant factors and methodologies used to estimate loss reserves vary significantly by product line due to differences in loss exposure and claim complexity. Much of our business is underwritten on an occurrence basis, which can lead to a significant time lag between the event that gives rise to a claim and the date on which the claim is reported to us. Additional time may be required to resolve the claim once it is reported to us. During these time lags, which can span several years for complex claims, new facts and information specific to the claim become known to us. In addition, general econometric and societal trends including inflation may change. Any one of these factors may require us to refine our loss reserve estimates on a regular basis. We apply a strict regimen to assure that review of these facts and trends occurs on a timely basis so that this information can be factored into our estimate of future liabilities. However, due to the number and potential magnitude of these variables, actual paid losses in future periods may differ materially from our estimates as reflected in current reserves. These differences can be favorable or unfavorable. A more precise estimation of loss reserves is also hindered by the effects of growth in a line of business and uncertainty as to how new business performs in relation to expectations established through analysis of the existing portfolio. In addition to reserving for known claim events, we also establish loss reserves for IBNR. Loss reserves for IBNR are set using our estimates for events that have occurred as of the balance sheet date but have not yet been reported to us. Estimation of IBNR loss reserves is subject to significant uncertainty.
The following is a summary of gross and net loss reserves we recorded by line of business:
December 31, 2024
(in millions)
Gross
Net
Casualty Lines
Specialty Lines
Run-off Lines
Total reserves
December 31, 2023
(in millions)
Gross
Net
Casualty Lines
Specialty Lines
Run-off Lines
Total reserves
Loss Reserve Estimation Methods
The process for estimating our loss reserves begins with the collection and analysis of claim data. The data collected for actuarial analyses includes reported claims, paid losses and case reserve estimates sorted by the year the loss occurred. The data sets are sorted into homogeneous groupings, exhibiting similar loss and exposure characteristics. We primarily use internal data in the analysis but also consider industry data in developing factors and estimates. We analyze loss reserves on a quarterly basis.
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We use a variety of actuarial techniques and methods to determine loss reserves for all lines of business. Each method has its own set of assumptions, and each has strengths and weaknesses depending on the exposures being evaluated. Since no single estimation method is superior to another method in all situations, the methods and assumptions used to project loss reserves will vary by line of business and, when appropriate, by where we attach on a risk. We use what we believe to be the most appropriate set of actuarial methods and assumptions for each product line grouping. While the loss projection methods may vary by product line, the general approach for calculating IBNR remains the same: ultimate losses are forecasted first, and that amount is reduced by the amount of cumulative paid claims and case reserves.
When we initially establish IBNR reserves at the beginning of an accident year for each line of business, we often use the expected loss ratio method. This method is based upon our analyses of historical loss ratios incorporating adjustments for pricing changes, anticipated loss ratio trends, changes in mix of business and any other factors that may impact loss ratio expectations. At the end of each quarter, we review the loss ratio selections and the emerged loss experience to determine if deviating from the loss ratio method is appropriate. In general, we continue to use the loss ratio method until we deem it appropriate to begin to rely on the experience of the accident year (“AY”) being evaluated. This weighing in of the AY experience is typically done by employing the Bornhuetter-Ferguson (“BF”) reserving methodology. The BF methods compute IBNR through a blend of the expected loss ratio method and traditional loss development methods. The BF methods estimate IBNR for an accident year as the product of expected losses (earned premium multiplied by an expected loss ratio) and an expected percentage of unreported losses. The expected percentage of unreported losses is derived from age-to-ultimate loss development factors that result from our analyses of loss development triangles. As accident years mature to the point at which the reported loss experience is more credible, we assign increasing weight to the paid and incurred loss development methods.
For short-tail lines of business such as property, we generally defer to the AY loss experience more quickly as the time from claim occurrence to reporting is generally short. In the event there are large claims incurred, we will analyze large loss information separately to ensure that the loss reserving methods appropriately recognize the magnitude of these losses in the evaluation of ultimate losses.
For long-tail lines such as general liability and automobile liability, the loss experience is not deemed fully credible for several years. At the end of the accident year, we rely primarily on the BF methods and continue to rely on those methods for several years. We assign greater weight to the paid and incurred development methods as the data matures.
Workers compensation is also a long-tail line of business, and is reserved for in keeping with other long-tailed business. However, a portion of the outstanding reserves correspond to scheduled indemnity payments and are not subject to extreme volatility. The portion of reserves that is not scheduled or annuitized is subject to potentially large variations in ultimate loss cost due to the uncertainty of medical cost inflation. Sources of medical cost inflation include increased use, new and more expensive medical testing procedures and prescription drugs costs.
The Run-off Lines segment includes reserves for asbestos, environmental and other latent exposures. These latent exposures are typically characterized by extended periods of time between the dates an insured is first exposed to a loss, a claim is reported and the claim is resolved. For those Run-off Lines segment long-tail loss reserves, there is significant uncertainty involved in estimating reserves for asbestos, environmental and other latent injury claims. We use several methods to estimate reserves for these claims including an approach that projects future calendar period claims and average claim costs and ground-up analysis that relies on an evaluation of individual policy terms and conditions. We also consider survival ratio and market share methods which compare our level of loss reserves and loss payments to that of the industry for similar exposures. We apply greatest weight to the method that projects future calendar period claims and average claim costs because we believe it best captures the unique claim characteristics of our underlying exposures and loss development potential. We perform a full review of our Run-off Lines asbestos, environmental and other latent exposures loss reserves at least once a year and review loss activity quarterly for significant changes that might impact management’s best estimate.
Each business segment is analyzed individually, with development characteristics for each short-tail and long-tail line of business identified and applied accordingly. In comparing loss reserve methods and assumptions used at December 31, 2024 as compared with methods and assumptions used at December 31, 2023, management has not changed or adjusted methodologies or assumptions in any significant manner.
In conducting our actuarial analyses, we generally assume that past patterns demonstrated in the data will repeat themselves and that the data provides a basis for estimating future loss reserves. In the event that we become aware of a material change that may render past experience inappropriate for the purpose of estimating current loss reserves, we will attempt to quantify the effect of the change and use informed management judgment to adjust loss reserve forecasts appropriately.
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Uncertainties in Loss Reserve Estimation
The causes of uncertainty will vary for each product line reviewed. For short-tail property lines of business, we are exposed to catastrophe losses, both natural and man-made. Due to the nature of certain catastrophic loss events, such as hurricanes, earthquakes or terrorist attacks, our normal claims resolution processes may be impaired due to factors such as difficulty in accessing impacted areas and other physical, legal and regulatory impediments. These factors can make establishment of accurate loss reserve estimates difficult and render such estimates subject to greater uncertainty. Additionally, if the catastrophe occurs near the end of a financial reporting period, there are additional uncertainties in loss reserve estimates due to the lack of sufficient time to conduct a thorough analysis. Long-tail casualty lines of business also present challenges in establishing appropriate loss reserves, for example if changes in the legal environment occur over time which broaden our liability or scope of policy coverage and increase the magnitude of claim payments.
In all lines, final claim payments may differ from the established loss reserve. Due to the uncertainties discussed above, the ultimate losses may vary materially from current loss reserves and could have a material adverse or beneficial effect on our future financial condition, results of operations and cash flows. Any adjustments to loss reserves are reflected in the results for the year during which the adjustments are made.
In addition to the previously described general uncertainties encountered in estimating loss reserves, there are significant additional uncertainties in estimating the amount of our potential losses from asbestos and environmental claims. Loss reserves for asbestos and environmental claims normally cannot be estimated with traditional loss reserving techniques that rely on historical accident year development factors due to the uncertainties surrounding these types of claims. Among the uncertainties impacting the estimation of such losses are:
• potentially long waiting periods between exposure and emergence of any bodily injury or property damage;
• difficulty in identifying sources of environmental or asbestos contamination and in properly allocating responsibility and/or liability for damage;
• changes in underlying laws and judicial interpretation of those laws;
• potential for an environmental or asbestos claim to involve many insurance providers over many policy periods;
• long reporting delays from insureds to insurance companies;
• historical data concerning asbestos and environmental losses which is more limited than historical information on other types of claims;
• questions concerning interpretation and application of insurance coverage; and
• uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure.
Case reserves and expense reserves for costs of related litigation have been established where sufficient information has been developed. Additionally, IBNR has been established to cover additional exposure on known and unknown claims.
We underwrite environmental and pollution coverage on a limited number of policies and underground storage tanks. We establish loss reserves to the extent that, in the judgment of management, the facts and prevailing law reflect an exposure for us.
Risk Factors by Line of Business in Loss Reserve Estimation
The following section details reserving considerations and loss and LAE risk factors for the lines of business representing most of our loss reserves. Each line of business may be present in multiple reportable segments. Each risk factor presented will have a different impact on required loss reserves. Also, risk factors can have offsetting or compounding effects on required loss reserves. For example, introduction and approval of a more expensive medical procedure may result in higher estimates for medical costs. But in the workers compensation context, the availability of that same medical procedure may enable workers to return to work more quickly, thereby lowering estimates for indemnity costs for that line of business. As a result, it usually is not possible to identify and measure the impact that a change in one discrete risk factor may have or construct a meaningful sensitivity expectation around it. We do not make explicit estimates of the impact on loss reserve estimates for the assumptions related to the risk factors described below.
Loss adjustment expenses used in connection with our loss reserves are comprised of both allocated and unallocated expenses. Allocated loss adjustment expenses generally relate to specific claim files. We often combine allocated loss adjustment expenses with losses for purposes of projecting ultimate liabilities. For some types of claims, such as asbestos, environmental, professional liability, and construction defect, allocated loss adjustment expenses consisting primarily of legal defense costs may be significant, sometimes exceeding the liability to indemnify claimants for losses. Unallocated loss adjustment expenses generally relate to the administration and handling of claims in the ordinary course of business. We typically calculate unallocated loss adjustment expense reserves using a percentage of unpaid losses for each line of business.
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Workers Compensation
Workers compensation is generally considered a long-tail coverage as it takes a relatively long period of time to finalize claims from a given accident year. Certain payments, such as initial medical treatment or temporary wage replacement for the injured worker, are generally disbursed quickly. Other payments may be made over the course of several years, such as awards for permanent partial injuries. Some payments continue to take place throughout the injured worker’s life, such as permanent disability benefits and on-going medical care. Although long-tail in nature, claims generally are not subject to long reporting lags, settlements are generally not complex and most of the liability exposure is characterized by high frequency and moderate severity. The largest reserve risks are generally associated with low frequency, high severity claims that require lifetime coverage for medical expense arising from a worker’s injury.
Examples of loss and LAE risk factors that can change over time and cause workers compensation loss reserves to fluctuate include, but are not limited to, the following:
Indemnity claims risk factors:
• Time required to recover from the injury;
• Degree of available transitional jobs;
• Degree of legal involvement;
• Changes in the interpretations and processes of the workers compensation commissions’ oversight of claim;
• Future wage inflation for U.S. states that index benefits;
• Changes in the administrative policies of second injury funds; and
• Changes in benefit levels.
Medical claims risk factors:
• Changes in the cost of medical treatments, including prescription drugs, and underlying fee schedules;
• Frequency of visits to health providers;
• Number of medical procedures given during visits to health providers;
• Types of health providers used;
• Type of medical treatments received;
• Use of preferred provider networks and other medical cost containment practices;
• Availability of new medical processes and equipment;
• Changes in life expectancy;
• Changes in the use of pharmaceutical drugs; and
• Degree of patient responsiveness to treatment.
Book of Business risk factors:
• Injury type mix;
• Changes in underwriting standards; and
• Changing product mix based on insured demand.
Short-tail Specialty Lines
Short-tail specialty lines of business include several different coverages, such as marine and surety. They are considered shorter-tail lines as claims are generally known relatively quickly. However, it can take a longer period of time to finalize and resolve all claims from a given year for lines such as surety. Examples of loss and LAE risk factors associated with Specialty claims that can change over time and result in adjustments to loss reserves include, but are not limited to, the following:
Claims risk factors:
• Changes in claim handling procedures;
• Changes in policy provisions or court interpretation of such provisions;
• Changes in the economy; and
• Changes in inflation.
Book of Business risk factors:
• Incidence of catastrophes;
• Changes in policy provisions (e.g., deductibles, policy limits, endorsements);
• Changes in underwriting standards; and
• Product mix (e.g., size of account, class, industries insured, jurisdiction mix).
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Commercial Automobile Liability
The commercial automobile liability line of business is a long-tail coverage, mainly due to exposures arising out of bodily injury claims. Losses in this line associated with bodily injury claims generally are more difficult to accurately estimate and take longer to resolve. Claim reporting lags also can occur. Examples of loss and LAE risk factors that can change over time and result in adjustments to commercial automobile liability loss reserves include, but are not limited to, the following:
Claims risk factors:
• Trends in jury awards;
• Changes in the underlying court system;
• Changes in case law;
• Litigation trends;
• Subrogation opportunities;
• Changes in claim handling procedures;
• Frequency of visits to health providers;
• Types of medical treatments received;
• Changes in cost of medical treatments; and
• Degree of patient responsiveness to treatment.
Book of Business risk factors:
• Changes in policy provisions (e.g., deductibles, policy limits, endorsements, etc.);
• Changes in mix of insured vehicles;
• Changes in underwriting standards;
• Gasoline prices; and
• Changes in macroeconomic factors including but not limited to unemployment statistics.
Property
Property is considered a short-tail line as claims are generally known quickly and resolved in a short period of time. However, the time to resolve a claim can be longer when the claim involves more difficult to resolve components such as business interruption losses or when the business is written on an excess basis. Examples of loss and LAE risk factors associated with Property claims that can change over time and result in adjustments to loss reserves include, but are not limited to, the following:
Claims risk factors:
• Changes in claim handling procedures;
• Changes in the cost of building materials;
• Changes in the cost of labor available to repair damages;
• Disruptions to the supply chain;
• Demand surge related to catastrophe events;
• Changes in policy provisions or court interpretation of such provisions; and
• Changes in inflation.
Book of Business risk factors:
• Incidence of catastrophes;
• Geographical concentration of risks;
• Changes in policy provisions (e.g., deductibles, policy limits, endorsements);
• Changes in underwriting standards; and
• Product mix (e.g., size of account, class, industries insured, jurisdiction mix).
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Professional Lines
Professional Lines, including errors and omissions and directors and officers coverages, are considered long-tail lines of business, as it takes a relatively long period of time to finalize and resolve all claims from a given year. The speed at which claims are received and then resolved is a function of the specific coverage provided, jurisdiction in which the claim is located and specific policy provisions. There are numerous components underlying the Professional line. Some of these have relatively moderate payout patterns (such as primary coverage written on a claims-made basis) with most of the claims for a given year closed within five to seven years. Others, including business written on an excess basis, can be characterized by longer time lags for payment of claims. Allocated loss adjustment expenses in this line consist primarily of legal costs and may exceed the total amount of the indemnity loss on some claims.
Examples of loss and LAE risk factors associated with Professional Lines claims that can change over time and result in adjustments to loss reserves include, but are not limited to, the following:
Claims risk factors:
• Changes in claim handling procedures;
• Changes in policy provisions or court interpretation of such provisions;
• New or expanded theories of liability;
• Trends in jury awards;
• Changes in the propensity to sue, in general and with specificity to particular issues;
• Changes in statutes of limitations;
• Changes in the underlying court system, including potential impacts from shutdowns associated with COVID-19;
• Changes in tort law;
• Fluctuations in stock prices;
• Lawsuit abuse and third-party litigation finance;
• Changes in the propensity to litigate rather than settle a claim;
• Shifts in lawsuit mix between U.S. federal and state courts; and
• Changes in inflation.
Book of Business risk factors:
• Changes in policy provisions (e.g., deductibles, policy limits, endorsements);
• Changes in underwriting standards; and
• Product mix (e.g., size of account, class, industries insured, jurisdiction mix).
General Liability
General liability is considered a long-tail line of business, as it takes a relatively long period of time to finalize and resolve all claims from a given accident year. The speed at which claims are received and then resolved is a function of the specific coverage provided, jurisdiction in which the claim is located and specific policy provisions. There are numerous components underlying the general liability product line. Some of these have relatively moderate payout patterns with most of the claims for a given accident year closed within five to seven years, while others, including claims alleging construction defect, are characterized by extreme time lags for both reporting and payment of claims. In addition, this line includes asbestos and environmental claims, which are reviewed separately because of the unique character of these exposures. Allocated loss adjustment expenses in this line consist primarily of legal costs and may exceed the total amount of the indemnity loss on some claims.
Major factors contributing to uncertainty in loss reserve estimates for general liability include reporting lags (i.e., the length of time between the event triggering coverage and the actual reporting of the claim), the number of parties involved in the underlying tort action, events triggering coverage that are spread over multiple time periods, the inability to know in advance what actual indemnity costs will be associated with an individual claim, the potential for disputes over whether claims were reasonably foreseeable and intended to be covered at the time the contracts were underwritten and the potential for mass tort claims and class actions. Generally, claims with a longer reporting lag time are characterized by greater inherent risk of uncertainty.
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Examples of loss and LAE risk factors associated with general liability claims that can change over time and result in adjustments to loss reserves include, but are not limited to, the following:
Claims risk factors:
• Changes in claim handling procedures;
• Changes in policy provisions or court interpretation of such provisions;
• New or expanded theories of liability;
• Trends in jury awards;
• Changes in the propensity to sue, in general and with specificity to particular issues;
• Changes in statutes of limitations;
• Changes in the underlying court system;
• Changes in tort law;
• Frequency of visits to health care providers;
• Types of medical treatments received;
• Shifts in lawsuit mix between U.S. federal and state courts; and
• Changes in inflation.
Book of Business risk factors:
• Changes in policy provisions (e.g., deductibles, policy limits, endorsements);
• Changes in underwriting standards; and
• Product mix (e.g., size of account, class, industries insured, jurisdiction mix).
Impact of changes in key assumptions on reserve volatility
We estimate reserves using a variety of methods, assumptions and data elements. The reserve estimation process includes explicit assumptions about a number of factors in the internal and external environment. Across most lines of business, the most important assumptions are future loss development factors applied to paid or reported losses to date. The trend in loss costs is also a key assumption, particularly in the most recent accident years, where loss development factors are less credible.
The following discussion includes disclosure of possible variations from current estimates of loss reserves due to a change in certain key assumptions. Each of the impacts described below is estimated individually, without consideration for any correlation among other key assumptions or among lines of business. Therefore, it could be misleading to take each of the amounts described below and add them together in an attempt to estimate volatility for reserves in total. The estimated variations in reserves due to changes in key assumptions discussed below are a reasonable estimate of possible variations that may occur in the future, likely over a period of several calendar years. It is important to note that the variations discussed herein are not exhaustive and are not meant to be a worst or best case scenario, and therefore, it is possible that future variations may be more than amounts discussed below.
Recorded gross reserves for Casualty Lines were $2,416.6 million as of December 31, 2024. For Casualty losses relating to ongoing operations, loss development patterns are a key assumption for this line of business. Historically, assumptions on loss development patterns have been impacted by, among other things, changes in inflation, and emergence of new types of claims (e.g., construction defect claims) or a shift in the mixture between smaller, more routine claims and larger, more complex claims. We have reviewed the historical variation in loss development patterns for Casualty losses deriving from continuing operations. If the incurred loss development patterns change by 20%, a change that we have experienced in the past and that management considers possible, the estimated net reserve could change by $200.0 million, in either direction.
Specialty reserves are also affected by loss development pattern assumptions. Historically, assumptions on loss development patterns have been impacted by, among other things, movements on individual claims, and economic conditions. We have reviewed the historical variation in loss development patterns for Specialty losses. Recorded gross reserves for Specialty were $643.1 million as of December 31, 2024. If the incurred development patterns underlying our net reserves for this line of business change by 20%, a change that we have experienced in the past and that management considers possible, the estimated net reserve could change by $45.0 million, in either direction.
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Similar to Casualty and Specialty Lines, reserves for Run-off Lines are affected by loss development pattern assumptions. Historically, assumptions on loss development patterns have been impacted by, among other things, changes in inflation, movements on individual claims, emergence of new types of claims, and changes in the mixture between smaller, more routine claims and larger, more complex claims. We have reviewed the historical variation in loss development patterns for Run-off Lines losses. Recorded gross reserves for Run-off Lines were $2,738.9 million, with approximately 2% of that amount related to run-off asbestos and environmental exposures as of December 31, 2024. If the incurred development patterns underlying our net reserves for this line of business change by 20%, a change that we have experienced in the past and that management considers possible, the estimated net reserve could change by $165.0 million, in either direction.
With respect to asbestos and environmental general liability losses, we wrote several different categories of insurance contracts that may cover asbestos and environmental claims. First, we wrote primary policies providing the first layer of coverage in an insured’s general liability insurance program. Second, we wrote excess policies providing higher layers of general liability insurance coverage for losses that exhaust the limits of underlying coverage. Third, we acted as a reinsurer assuming a portion of those risks from other insurers underwriting primary, excess and reinsurance coverage. Fourth, we participated in the London Market, underwriting both direct insurance and assumed reinsurance business. With regard to both environmental and asbestos claims, significant uncertainty limits the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related expenses. Traditional actuarial reserving techniques cannot reasonably estimate the ultimate cost of these claims, particularly during periods where theories of law are in a state of continued uncertainty. The degree of variability of reserve estimates for these types of exposures is significantly greater than for other more traditional general liability exposures, and as such, we believe there is a high degree of uncertainty inherent in the estimation of asbestos and environmental loss reserves.
In the case of the reserves for asbestos exposures, factors contributing to the high degree of uncertainty include inadequate loss development patterns, plaintiffs’ expanding theories of liability, the risks inherent in major litigation and inconsistent emerging legal outcomes. Furthermore, over time, insurers, including Argo Group, have experienced significant changes in the rate at which asbestos claims are brought, claims experience of particular insureds and value of claims, making predictions of future exposure from past experience uncertain. For example, in the past, insurers in general, including Argo Group, have experienced an increase in the number of asbestos-related claims due to, among other things, plaintiffs’ increased focus on new and previously peripheral defendants and an increase in the number of insureds seeking bankruptcy protection as a result of asbestos-related liabilities. Plaintiffs and insureds have sought to use bankruptcy proceedings, including “pre-packaged” bankruptcies, to accelerate the funding and amount of loss payments by insurers. In addition, some policyholders continue to assert new classes of claims for coverage to which an aggregate limit of liability may not apply. Further uncertainties include insolvencies of other insurers and reinsurers, delays in the reporting of new claims by insurers and reinsurers and unanticipated issues influencing our ability to recover reinsurance for asbestos and environmental claims. Management believes these issues are not likely to be resolved in the near future.
In the case of the reserves for environmental exposures, factors contributing to the high degree of uncertainty include expanding theories of liability and damages, the risks inherent in major litigation, inconsistent decisions concerning the existence and scope of coverage for environmental claims and uncertainty as to the monetary amount being sought by the claimant from the insured.
The reporting pattern for assumed reinsurance claims, including those related to asbestos and environmental claims is much longer than for direct claims. In many instances, it takes months or years to determine that the policyholder’s own obligations have been met and how the reinsurance in question may apply to such claims. The delay in reporting reinsurance claims and exposures adds to the uncertainty of estimating the related reserves.
The factors discussed above affect the variability of estimates for asbestos and environmental reserves including assumptions with respect to the frequency of claims, average severity of those claims settled with payment, dismissal rate of claims with no payment and expense to indemnity ratio. The uncertainty with respect to the underlying reserve assumptions for asbestos and environmental adds a greater degree of variability to these reserve estimates than reserve estimates for more traditional exposures. The process of estimating asbestos and environmental reserves remains subject to a wide variety of uncertainties. Due to these uncertainties, further developments could cause us to change our estimates of our asbestos and environmental reserves, and the effect of these changes could be material to our consolidated operating results, financial condition and liquidity.
Loss Reserve Estimation Variability
After reviewing the output from various loss reserving methodologies, we select our best estimate of reserves. We believe that the aggregate loss reserves at December 31, 2024 were adequate to cover claims for losses that have occurred, including both known claims and claims yet to be reported. As of December 31, 2024, we recorded gross loss reserves of $5,798.6 million and loss reserves net of reinsurance of $3,003.9 million. Although our financial reports reflect our best estimate of reserves, it is unlikely that the final amount paid will exactly equal our best estimate.
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In establishing our best estimate for reserves, we consider facts currently known and the present judicial and legislative environment among other factors. However, given the expansion of coverage and liability by the courts, legislation in the recent past and possibility of similar interpretations in the future, particularly with regard to asbestos and environmental claims, additional loss reserves may develop in future periods. These potential increases cannot be reasonably estimated at the present time. Any increases could have an adverse impact on future operating results, liquidity, risk-based capital ratios and ratings assigned to our insurance subsidiaries by the nationally recognized insurance rating agencies.
