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Section 1: 10-Q (FORM 10-Q)

agii-10q_20160930.htm

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 1-15259

 

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

(Exact name of registrant as specified in its charter)

 

 

Bermuda

 

98-0214719

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

110 Pitts Bay Road
Pembroke HM08
Bermuda

 

P.O. Box HM 1282
Hamilton HM FX
Bermuda

(Address of principal executive offices)

 

(Mailing address)

(441) 296-5858

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Security

 

Name of Each Exchange on Which Registered

Common Stock, par value of $1.00 per share

 

NASDAQ Global Select Market

Guarantee of Argo Group US, Inc. 6.500% Senior Notes due 2042

 

NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   

Accelerated filer  

Non-accelerated filer  

Smaller reporting company  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

Indicate the number of shares outstanding (net of treasury shares) of each of the issuer’s classes of common shares as of October 31, 2016.

 

Title

Outstanding

Common Shares, par value $1.00 per share

29,966,008

 

 

 

 

 

 

 


 

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

INDEX

 

 

 

 

Page

PART I. Financial Information

3

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited)

3

 

 

Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

3

 

 

Condensed Consolidated Statements of Income for three and nine months ended September 30, 2016 and 2015

4

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015

5

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015

6

 

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

41

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

51

Item 4.

 

Controls and Procedures

52

PART II. Other Information

53

 

Item 1.

 

Legal Proceedings

53

Item 1A.

 

Risk Factors

53

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

53

Item 3.

 

Defaults Upon Senior Securities

54

Item 4.

 

Mine Safety Disclosures

54

Item 5.

 

Other Information

54

Item 6.

 

Exhibits

54

 

 

Signatures

56

 

 

 

 


 

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except number of shares and per share amounts)

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015 *

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale, at fair value (cost: 2016 - $3,008.8;

   2015 - $2,971.0)

 

$

3,044.6

 

 

$

2,927.3

 

Equity securities available-for-sale, at fair value (cost: 2016 - $345.6;

   2015 - $349.7)

 

 

453.7

 

 

 

463.9

 

Other investments (cost: 2016 - $518.7; 2015 - $506.9)

 

 

526.1

 

 

 

513.7

 

Short-term investments, at fair value (cost: 2016 - $289.2; 2015 - $211.2)

 

 

289.2

 

 

 

210.8

 

Total investments

 

 

4,313.6

 

 

 

4,115.7

 

Cash

 

 

123.6

 

 

 

121.7

 

Accrued investment income

 

 

21.9

 

 

 

21.6

 

Premiums receivable

 

 

503.4

 

 

 

404.5

 

Reinsurance recoverables

 

 

1,283.1

 

 

 

1,121.1

 

Goodwill

 

 

152.2

 

 

 

152.2

 

Intangible assets, net of accumulated amortization

 

 

68.9

 

 

 

73.3

 

Current income taxes receivable, net

 

 

 

 

 

11.6

 

Deferred acquisition costs, net

 

 

147.7

 

 

 

132.4

 

Ceded unearned premiums

 

 

311.6

 

 

 

250.8

 

Other assets

 

 

255.1

 

 

 

220.7

 

Total assets

 

$

7,181.1

 

 

$

6,625.6

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Reserves for losses and loss adjustment expenses

 

$

3,284.8

 

 

$

3,123.6

 

Unearned premiums

 

 

1,010.2

 

 

 

886.7

 

Accrued underwriting expenses

 

 

103.0

 

 

 

133.9

 

Ceded reinsurance payable, net

 

 

452.8

 

 

 

312.4

 

Funds held

 

 

65.7

 

 

 

77.6

 

Senior unsecured fixed rate notes

 

 

139.4

 

 

 

139.3

 

Other indebtedness

 

 

57.3

 

 

 

55.2

 

Junior subordinated debentures

 

 

172.7

 

 

 

172.7

 

Current income taxes payable, net

 

 

7.7

 

 

 

 

Deferred tax liabilities, net

 

 

40.7

 

 

 

23.6

 

Other liabilities

 

 

58.4

 

 

 

32.5

 

Total liabilities

 

 

5,392.7

 

 

 

4,957.5

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Common shares - $1.00 par, 500,000,000 shares authorized; 39,980,160 and

   37,104,294 shares issued at September 30, 2016 and December 31, 2015,

   respectively

 

 

40.0

 

 

 

37.1

 

Additional paid-in capital

 

 

1,119.8

 

 

 

964.9

 

Treasury shares (9,996,840 and 9,181,644 shares at September 30, 2016

   and December 31, 2015, respectively)

 

 

(376.4

)

 

 

(331.1

)

Retained earnings

 

 

933.8

 

 

 

985.7

 

Accumulated other comprehensive income, net of taxes

 

 

71.2

 

 

 

11.5

 

Total shareholders' equity

 

 

1,788.4

 

 

 

1,668.1

 

Total liabilities and shareholders' equity

 

$

7,181.1

 

 

$

6,625.6

 

 

*

Derived from audited consolidated financial statements.

See accompanying notes.

 

3


 

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except number of shares and per share amount)

(Unaudited)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Premiums and other revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earned premiums

 

$

358.7

 

 

$

346.0

 

 

$

1,048.5

 

 

$

1,026.6

 

Net investment income

 

 

32.7

 

 

 

18.4

 

 

 

89.6

 

 

 

68.5

 

Fee and other income

 

 

7.6

 

 

 

9.2

 

 

 

20.2

 

 

 

17.9

 

Net realized investment and other gains

 

 

17.7

 

 

 

6.6

 

 

 

12.8

 

 

 

20.4

 

Total revenue

 

 

416.7

 

 

 

380.2

 

 

 

1,171.1

 

 

 

1,133.4

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

207.8

 

 

 

200.0

 

 

 

596.0

 

 

 

574.3

 

Underwriting, acquisition and insurance expenses

 

 

137.4

 

 

 

132.8

 

 

 

403.0

 

 

 

401.9

 

Interest expense

 

 

4.9

 

 

 

4.8

 

 

 

14.6

 

 

 

14.3

 

Fee and other expense

 

 

5.9

 

 

 

8.2

 

 

 

18.1

 

 

 

18.0

 

Foreign currency exchange (gain) loss

 

 

(1.5

)

 

 

(1.8

)

 

 

4.5

 

 

 

(8.4

)

Total expenses

 

 

354.5

 

 

 

344.0

 

 

 

1,036.2

 

 

 

1,000.1

 

Income before income taxes

 

 

62.2

 

 

 

36.2

 

 

 

134.9

 

 

 

133.3

 

Provision for income taxes

 

 

7.0

 

 

 

0.9

 

 

 

21.1

 

 

 

11.3

 

Net income

 

$

55.2

 

 

$

35.3

 

 

$

113.8

 

 

$

122.0

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.84

 

 

$

1.15

 

 

$

3.76

 

 

$

3.96

 

Diluted

 

$

1.80

 

 

$

1.13

 

 

$

3.68

 

 

$

3.89

 

Dividend declared per common share

 

$

0.22

 

 

$

0.18

 

 

$

0.64

 

 

$

0.55

 

Weighted average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

30,018,637

 

 

 

30,707,233

 

 

 

30,227,725

 

 

 

30,796,390

 

Diluted

 

 

30,728,383

 

 

 

31,320,943

 

 

 

30,889,487

 

 

 

31,393,092

 

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net realized investment and other (losses) gains before other-

   than-temporary impairment losses

 

$

20.1

 

 

$

10.0

 

 

$

21.8

 

 

$

25.7

 

Other-than-temporary impairment losses recognized in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other-than-temporary impairment losses on fixed maturities

 

 

(0.6

)

 

 

 

 

 

(1.7

)

 

 

(0.9

)

Other-than-temporary impairment losses on equity securities

 

 

(1.8

)

 

 

(3.4

)

 

 

(7.3

)

 

 

(4.4

)

Impairment losses recognized in earnings

 

 

(2.4

)

 

 

(3.4

)

 

 

(9.0

)

 

 

(5.3

)

Net realized investment and other gains

 

$

17.7

 

 

$

6.6

 

 

$

12.8

 

 

$

20.4

 

 

See accompanying notes.

 

 

 

4


 

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income

 

$

55.2

 

 

$

35.3

 

 

$

113.8

 

 

$

122.0

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1.0

)

 

 

(4.0

)

 

 

2.8

 

 

 

(6.6

)

Unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) arising during the year

 

 

19.8

 

 

 

(69.7

)

 

 

97.7

 

 

 

(104.3

)

Reclassification adjustment for gains included in net

   income

 

 

(17.0

)

 

 

0.1

 

 

 

(25.1

)

 

 

(6.9

)

Other comprehensive income (loss) before tax

 

 

1.8

 

 

 

(73.6

)

 

 

75.4

 

 

 

(117.8

)

Income tax provision (benefit) related to other comprehensive

   income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (loss) on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) arising during the year

 

 

7.6

 

 

 

(18.3

)

 

 

27.5

 

 

 

(28.6

)

Reclassification adjustment for gains included in net

   income

 

 

(7.9

)

 

 

(1.7

)

 

 

(11.8

)

 

 

(4.6

)

Income tax provision (benefit) related to other comprehensive

   income (loss)

 

 

(0.3

)

 

 

(20.0

)

 

 

15.7

 

 

 

(33.2

)

Other comprehensive income (loss), net of tax

 

 

2.1

 

 

 

(53.6

)

 

 

59.7

 

 

 

(84.6

)

Comprehensive income (loss)

 

$

57.3

 

 

$

(18.3

)

 

$

173.5

 

 

$

37.4

 

 

See accompanying notes.

 

 

 

5


 

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

  

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

113.8

 

 

$

122.0

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Amortization and depreciation

 

 

27.4

 

 

 

30.7

 

Share-based payments expense

 

 

11.1

 

 

 

20.8

 

Excess tax benefit from share-based payment arrangements

 

 

(0.1

)

 

 

(0.6

)

Deferred income tax provision, net

 

 

2.3

 

 

 

13.8

 

Net realized investment and other gains

 

 

(12.8

)

 

 

(20.4

)

Undistributed earnings from alternative investment portfolio

 

 

(20.8

)

 

 

(4.6

)

Amortization of debt issuance costs

 

 

0.1

 

 

 

0.1

 

Loss on disposals of fixed assets, net

 

 

0.2

 

 

 

0.2

 

Change in:

 

 

 

 

 

 

 

 

Accrued investment income

 

 

(0.3

)

 

 

1.1

 

Receivables

 

 

(255.5

)

 

 

(162.2

)

Deferred acquisition costs

 

 

(14.9

)

 

 

(17.6

)

Ceded unearned premiums

 

 

(59.8

)

 

 

(58.5

)

Reserves for losses and loss adjustment expenses

 

 

154.2

 

 

 

75.9

 

Unearned premiums

 

 

120.3

 

 

 

123.0

 

Ceded reinsurance payable and funds held

 

 

128.3

 

 

 

134.3

 

Income taxes

 

 

19.7

 

 

 

(2.3

)

Accrued underwriting expenses

 

 

(27.4

)

 

 

(19.7

)

Other, net

 

 

(35.1

)

 

 

(0.2

)

Cash provided by operating activities

 

 

150.7

 

 

 

235.8

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Sales of fixed maturity investments

 

 

761.8

 

 

 

609.8

 

Maturities and mandatory calls of fixed maturity investments

 

 

839.0

 

 

 

637.4

 

Sales of equity securities

 

 

155.3

 

 

 

61.6

 

Sales of other investments

 

 

92.1

 

 

 

57.4

 

Purchases of fixed maturity investments

 

 

(1,650.7

)

 

 

(1,303.4

)

Purchases of equity securities

 

 

(114.7

)

 

 

(97.9

)

Purchases of other investments

 

 

(90.3

)

 

 

(67.2

)

Change in foreign regulatory deposits and voluntary pools

 

 

4.8

 

 

 

7.5

 

Change in short-term investments

 

 

(78.7

)

 

 

(69.9

)

Settlements of foreign currency exchange forward contracts

 

 

(7.2

)

 

 

(6.7

)

Purchases of fixed assets

 

 

(26.7

)

 

 

(22.0

)

Other, net

 

 

31.9

 

 

 

17.4

 

Cash used in investing activities

 

 

(83.4

)

 

 

(176.0

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Activity under stock incentive plans

 

 

0.6

 

 

 

1.5

 

Repurchase of Company's common shares

 

 

(45.3

)

 

 

(29.7

)

Excess tax expense from share-based payment arrangements

 

 

0.1

 

 

 

0.6

 

Payment of cash dividends to common shareholders

 

 

(19.8

)

 

 

(17.1

)

Cash used in financing activities

 

 

(64.4

)

 

 

(44.7

)

Effect of exchange rate changes on cash

 

 

(1.0

)

 

 

0.1

 

Change in cash

 

 

1.9

 

 

 

15.2

 

Cash, beginning of period

 

 

121.7

 

 

 

81.0

 

Cash, end of period

 

$

123.6

 

 

$

96.2

 

 

See accompanying notes.

 

6


 

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.

Basis of Presentation

The accompanying consolidated financial statements of Argo Group International Holdings, Ltd. (“Argo Group,” “we” or the “Company”) and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. The preparation of interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The major estimates reflected in our consolidated financial statements include, but are not limited to, reserves for losses and loss adjustment expenses; reinsurance recoverables, including the reinsurance recoverables allowance for doubtful accounts; estimates of written and earned premiums; reinsurance premium receivable; fair value of investments and assessment of potential impairment; valuation of goodwill and intangibles and our deferred tax asset valuation allowance. Actual results could differ from those estimates. Certain financial information that normally is included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission on February 26, 2016.

The interim financial information as of, and for the three and nine months ended, September 30, 2016 and 2015 is unaudited. However, in the opinion of management, the interim information includes all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results presented for the interim periods. The operating results for the interim periods are not necessarily indicative of the results to be expected for the full year. All significant intercompany amounts have been eliminated in consolidation.

During the first quarter of 2016, we evaluated our accounting for income from our alternative investment portfolio and determined that as we manage these investments to appreciate in value on a quarter to quarter basis, it is more appropriate to classify the change in value as net investment income as opposed to realized investment gains (losses). As a result, net investment income for the three and nine months ended September 30, 2016 includes $9.9 million and $20.8 million, respectively, related to the appreciation of our alternative investment portfolio. Net investment income and net realized and other gains for the three and nine months ended September 30, 2015 have been reclassified to reflect the current presentation. Specifically, net investment income for the three and nine months ended September 30, 2015 includes a decrease of $2.9 million and an increase of $4.6 million, respectively, related to the alternative investment portfolio, and net realized investment and other gains were increased for the three months ended September 30, 2015 and decreased for the nine months ended September 30, 2015 by these same amounts.

10% Stock Dividend

On May 3, 2016, our Board of Directors declared a 10% stock dividend, payable on June 15, 2016, to shareholders of record at the close of business on June 1, 2016. As a result of the stock dividend, 2,735,542 additional shares were issued. Cash was paid in lieu of fractional shares of our common shares. All references to share and per share amounts in this document and related disclosures have been adjusted to reflect the stock dividend for all periods presented.

 

 

2.

Recently Issued Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic 230). ASU 2016-15 will reduce diversity in practice on how eight specific cash receipts and payments are classified on the statement of cash flows. The ASU will be effective for fiscal years beginning after December 15, 2017, including interim periods within those years. We are currently evaluating the impact that the adoption of ASU 2016-15 will have on our financial results and disclosures.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (Topic 326). ASU 2016-13 requires organizations to estimate credit losses on certain types of financial instruments, including receivables and available-for-sale debt securities, by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The guidance requires a modified retrospective transition method and early adoption is permitted. We are currently evaluating the impact that the adoption of ASU 2016-13 will have on our financial results and disclosures.

7


 

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” (Topic 718). ASU 2016-09 simplifies the accounting for share-based payment award transactions including income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and accounting for forfeitures. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning December 15, 2018. We are currently evaluating the impact that the adoption of ASU 2016-09 will have on our financial results and disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). ASU 2016-02 requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additionally, ASU 2016-02 modifies current guidance for lessors' accounting. ASU 2016-02 is effective for interim and annual reporting periods beginning on or after January 1, 2019, with early adoption permitted. We are currently evaluating the impact that the adoption of ASU 2016-02 will have on our financial results and disclosures.

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (Subtopic 825-10). ASU 2016-01 will require equity investments that are not consolidated or accounted for under the equity method of accounting to be measured at fair value with changes in fair value recognized in net income. This ASU will also require us to assess the ability to realize our deferred tax assets (“DTAs”) related to an available-for-sale debt security in combination with our other DTAs. The ASU will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating the impact that the adoption of ASU 2016-01 will have on our financial results and disclosures.

In May 2015, the FASB issued ASU 2015-09, “Disclosures about Short-Duration Contracts” (Topic 944). ASU 2015-09 requires additional disclosures for unpaid claim liabilities and claim adjustment expenses for short-duration insurance contracts (i.e., coverage provided for a fixed period of short duration, typically a year or less). The standard will require tables showing incurred and paid claims development information by accident year for the number of years claims typically remain outstanding, but not more than 10 years, including a reconciliation of this information to the statement of financial position. This ASU is effective for annual periods beginning after December 15, 2015 and interim periods within annual periods after December 15, 2016. This ASU will increase the volume and level of detail in our financial disclosures around reserves for losses and loss adjustment expenses in our Forms 10-K.

In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (Subtopic 205-40). ASU 2014-15 requires entities to disclose whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued. Management is also required to evaluate and disclose whether it plans to alleviate the doubt. The ASU will apply to both annual and interim reporting periods. The standard is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016.  We do not anticipate that the adoption of ASU 2014-15 will have a material impact on our financial disclosures.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606), which replaces most existing GAAP revenue recognition guidance and permits the use of either the retrospective or cumulative effect transition method. In August 2015, “Deferral of the Effective Date” (Topic 606), deferred the effective date of this guidance to interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016. Subsequently, in 2016, the FASB issued implementation guidance related to ASU 2014-09, including:

 

ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (Topic 606), which is intended to provide further clarification on the application of the principal versus agent implementation;

 

ASU 2016-10, “Identifying Performance Obligations and Licensing” (Topic 606), which is intended to clarify the guidance for identifying promised goods or services in a contract with a customer;

 

ASU 2016-11, “Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting” (Topic 605 & 815); and

 

ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients” (Topic 606), which amends certain aspects of ASU 2014-09 to address certain implementation issues.

While insurance contracts are excluded from this ASU, fee income related to our brokerage operations and management of the third-party capital for our underwriting Syndicate at Lloyd’s will be subject to this updated guidance. We continue to evaluate what impact this ASU will have on our financial results and disclosures and which adoption method to apply, but do not anticipate such impact being material based on the limited revenue streams subject to the ASU.

8


 

Accounting Standards Retrospectively Adopted in 2016

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which amends the guidance in Accounting Standards Codification Topic 835-30 “Interest – Imputation of Interest.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. For public business entities, the guidance was effective for annual and interim periods beginning after December 15, 2015. We adopted this guidance effective January 1, 2016 and adjusted our prior period balances to reflect the adoption of this guidance.

As of December 31, 2015, we reported $4.5 million of unamortized debt issuance costs related to our senior unsecured fixed rate notes. The effects of the retrospective application of this guidance on individual financial statement line items in our Consolidated Balance Sheets were as follows:

 

 

 

December 31, 2015

 

(in millions)

 

As Previously Reported

 

 

As Adjusted

 

 

Effect of Change

 

Other assets

 

$

225.2

 

 

$

220.7

 

 

$

(4.5

)

Senior unsecured fixed rate notes

 

 

143.8

 

 

 

139.3

 

 

 

(4.5

)

 

The effects of the retrospective application of this guidance on individual financial statement line items in our Consolidated Statements of Cash Flows were as follows:

 

 

For the Nine Months Ended September 30, 2015

 

(in millions)

 

As Previously Reported

 

 

As Adjusted

 

 

Effect of Change

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of debt issuance costs

 

$

 

 

$

0.1

 

 

$

0.1

 

Other, net

 

$

(0.1

)

 

$

(0.2

)

 

$

(0.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

There were no changes to the Consolidated Statements of Income for the periods presented as a result of adoption of the authoritative guidance.

 

 

9


 

3.

Investments

Composition of Invested Assets

The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investments were as follows:

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

USD denominated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Governments

 

$

216.4

 

 

$

1.8

 

 

$

0.2

 

 

$

218.0

 

Non-U.S. Governments

 

 

92.7

 

 

 

0.8

 

 

 

 

 

 

93.5

 

Obligations of states and political subdivisions

 

 

387.0

 

 

 

20.8

 

 

 

0.1

 

 

 

407.7

 

Credit-Financial

 

 

494.3

 

 

 

11.4

 

 

 

0.5

 

 

 

505.2

 

Credit-Industrial

 

 

627.5

 

 

 

16.1

 

 

 

2.5

 

 

 

641.1

 

Credit-Utility

 

 

150.0

 

 

 

6.2

 

 

 

1.8

 

 

 

154.4

 

Structured securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMO/MBS-agency (1)

 

 

162.9

 

 

 

5.3

 

 

 

0.1

 

 

 

168.1

 

CMO/MBS-non agency

 

 

5.6

 

 

 

0.5

 

 

 

 

 

 

6.1

 

CMBS (2)

 

 

203.6

 

 

 

2.0

 

 

 

0.2

 

 

 

205.4

 

ABS (3)

 

 

122.5

 

 

 

0.5

 

 

 

0.2

 

 

 

122.8

 

CLO (4)

 

 

150.6

 

 

 

1.0

 

 

 

0.4

 

 

 

151.2

 

Foreign denominated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Governments

 

 

165.7

 

 

 

1.8

 

 

 

9.8

 

 

 

157.7

 

Credit

 

 

123.1

 

 

 

1.5

 

 

 

13.3

 

 

 

111.3

 

ABS/CMBS

 

 

18.1

 

 

 

 

 

 

2.8

 

 

 

15.3

 

CLO

 

 

88.8

 

 

 

2.8

 

 

 

4.8

 

 

 

86.8

 

Total fixed maturities

 

 

3,008.8

 

 

 

72.5

 

 

 

36.7

 

 

 

3,044.6

 

Equity securities

 

 

345.6

 

 

 

115.4

 

 

 

7.3

 

 

 

453.7

 

Other investments

 

 

518.7

 

 

 

7.5

 

 

 

0.1

 

 

 

526.1

 

Short-term investments

 

 

289.2

 

 

 

 

 

 

 

 

 

289.2

 

Total investments

 

$

4,162.3

 

 

$

195.4

 

 

$

44.1

 

 

$

4,313.6

 

 

(1) 

Collateralized mortgage obligations/mortgage-backed securities (“CMO/MBS”).

(2) 

Commercial mortgage-backed securities (“CMBS”).

(3) 

Asset-backed securities (“ABS”).

(4) 

Collateralized loan obligations (“CLO”).

10


 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

USD denominated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Governments

 

$

207.9

 

 

$

0.7

 

 

$

0.7

 

 

$

207.9

 

Non-U.S. Governments

 

 

93.0

 

 

 

0.1

 

 

 

1.3

 

 

 

91.8

 

Obligations of states and political subdivisions

 

 

467.6

 

 

 

20.7

 

 

 

0.3

 

 

 

488.0

 

Credit-Financial

 

 

502.3

 

 

 

6.2

 

 

 

2.6

 

 

 

505.9

 

Credit-Industrial

 

 

555.8

 

 

 

5.3

 

 

 

12.4

 

 

 

548.7

 

Credit-Utility

 

 

168.1

 

 

 

1.0

 

 

 

13.6

 

 

 

155.5

 

Structured securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMO/MBS-agency (1)

 

 

126.5

 

 

 

5.0

 

 

 

0.5

 

 

 

131.0

 

CMO/MBS-non agency

 

 

6.7

 

 

 

0.6

 

 

 

 

 

 

7.3

 

CMBS (2)

 

 

186.5

 

 

 

0.5

 

 

 

1.6

 

 

 

185.4

 

ABS (3)

 

 

111.0