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Section 1: 10-Q (10-Q)

argo-10q_20180331.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 or the quarterly period ended March 31, 2018

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)

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  

Accelerated filer  

Non-accelerated filer  

 

Smaller reporting company  

Emerging growth company  

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

If an emerging growth company, indicate by check mark whether the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate the number of shares outstanding (net of treasury shares) of each of the issuer’s classes of common shares as of May 3, 2018.

 

Title

Outstanding

Common Shares, par value $1.00 per share

33,889,661

 

 

 

 


 

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 March 31, 2018 and December 31, 2017

3

 

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2018 and 2017

4

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017

5

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2018 and 2017

6

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017

7

 

 

Notes to Condensed Consolidated Financial Statements

8

Item 2.

 

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

40

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

51

Item 4.

 

Controls and Procedures

52

PART II. Other Information

52

 

Item 1.

 

Legal Proceedings

52

Item 1A.

 

Risk Factors

52

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

52

Item 3.

 

Defaults Upon Senior Securities

53

Item 4.

 

Mine Safety Disclosures

53

Item 5.

 

Other Information

53

Item 6.

 

Exhibits

54

 

 

Signatures

56

 

 

 

 


 

PART I. FINANCIAL INFORMATION

 

 

Item 1. Consolidated Financial Statements

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017 *

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale, at fair value (cost: 2018 - $3,306.7; 2017 -

   $3,320.6)

 

$

3,291.5

 

 

$

3,343.4

 

Equity securities, at fair value (cost: 2018 - $358.3; 2017 - $338.2)

 

 

476.5

 

 

 

487.4

 

Other investments (cost: 2018 - $513.7; 2017 - $534.1)

 

 

523.3

 

 

 

543.6

 

Short-term investments, at fair value (cost: 2018 - $542.4; 2017 - $368.5)

 

 

542.2

 

 

 

368.5

 

Total investments

 

 

4,833.5

 

 

 

4,742.9

 

Cash

 

 

173.7

 

 

 

176.6

 

Accrued investment income

 

 

24.3

 

 

 

23.5

 

Premiums receivable

 

 

699.6

 

 

 

598.6

 

Reinsurance recoverables

 

 

2,087.5

 

 

 

2,093.3

 

Goodwill

 

 

161.4

 

 

 

161.4

 

Intangible assets, net of accumulated amortization

 

 

107.3

 

 

 

96.8

 

Current income taxes receivable, net

 

 

 

 

 

1.4

 

Deferred acquisition costs, net

 

 

163.9

 

 

 

160.4

 

Ceded unearned premiums

 

 

501.9

 

 

 

399.5

 

Other assets

 

 

388.2

 

 

 

309.6

 

Total assets

 

$

9,141.3

 

 

$

8,764.0

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Reserves for losses and loss adjustment expenses

 

$

4,283.6

 

 

$

4,201.0

 

Unearned premiums

 

 

1,270.1

 

 

 

1,207.7

 

Accrued underwriting expenses

 

 

113.5

 

 

 

115.3

 

Ceded reinsurance payable, net

 

 

865.2

 

 

 

734.0

 

Funds held

 

 

47.7

 

 

 

42.7

 

Senior unsecured fixed rate notes

 

 

139.7

 

 

 

139.6

 

Other indebtedness

 

 

186.4

 

 

 

184.5

 

Junior subordinated debentures

 

 

256.6

 

 

 

256.6

 

Current income taxes payable, net

 

 

2.2

 

 

 

 

Deferred tax liabilities, net

 

 

21.3

 

 

 

31.3

 

Other liabilities

 

 

167.6

 

 

 

31.6

 

Total liabilities

 

 

7,353.9

 

 

 

6,944.3

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Common shares - $1.00 par, 500,000,000 shares authorized; 44,911,805 and

   40,385,309 shares issued at March 31, 2018 and December 31, 2017,

   respectively

 

 

44.9

 

 

 

40.4

 

Additional paid-in capital

 

 

1,364.7

 

 

 

1,129.1

 

Treasury shares (11,099,593 and 10,785,007 shares at March 31, 2018

   and December 31, 2017, respectively)

 

 

(442.0

)

 

 

(423.4

)

Retained earnings

 

 

851.8

 

 

 

977.0

 

Accumulated other comprehensive (loss) income, net of taxes

 

 

(32.0

)

 

 

96.6

 

Total shareholders' equity

 

 

1,787.4

 

 

 

1,819.7

 

Total liabilities and shareholders' equity

 

$

9,141.3

 

 

$

8,764.0

 

 

*

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 amounts)

(Unaudited)

 

 

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Premiums and other revenue:

 

 

 

 

 

 

 

 

Earned premiums

 

$

414.7

 

 

$

379.4

 

Net investment income

 

 

36.0

 

 

 

30.5

 

Fee and other income

 

 

2.0

 

 

 

3.6

 

Net realized investment (losses) gains:

 

 

 

 

 

 

 

 

Net realized investment gains

 

 

15.2

 

 

 

14.6

 

Change in fair value of equity securities

 

 

(30.9

)

 

 

 

Net realized investment (losses) gains

 

 

(15.7

)

 

 

14.6

 

Total revenue

 

 

437.0

 

 

 

428.1

 

Expenses:

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

237.2

 

 

 

222.5

 

Underwriting, acquisition and insurance expenses

 

 

160.2

 

 

 

153.6

 

Interest expense

 

 

7.7

 

 

 

5.9

 

Fee and other expense

 

 

2.0

 

 

 

4.1

 

Foreign currency exchange losses (gains)

 

 

4.9

 

 

 

(0.7

)

Total expenses

 

 

412.0

 

 

 

385.4

 

Income before income taxes

 

 

25.0

 

 

 

42.7

 

Income tax provision

 

 

0.2

 

 

 

6.0

 

Net income

 

$

24.8

 

 

$

36.7

 

Net income per common share:

 

 

 

 

 

 

 

 

Basic

 

$

0.73

 

 

$

1.06

 

Diluted

 

$

0.71

 

 

$

1.03

 

Dividend declared per common share

 

$

0.27

 

 

$

0.23

 

Weighted average common shares:

 

 

 

 

 

 

 

 

Basic

 

 

33,868,749

 

 

 

34,554,341

 

Diluted

 

 

34,740,343

 

 

 

35,582,816

 

 

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net realized investment (losses) gains before

   other-than-temporary impairment losses

 

$

(14.7

)

 

$

15.0

 

Other-than-temporary impairment losses recognized in earnings:

 

 

 

 

 

 

 

 

Other-than-temporary impairment losses on fixed maturities

 

 

(1.0

)

 

 

 

Other-than-temporary impairment losses on equity securities

 

 

 

 

 

(0.4

)

Impairment losses recognized in earnings

 

 

(1.0

)

 

 

(0.4

)

Net realized investment (losses) gains

 

$

(15.7

)

 

$

14.6

 

 

See accompanying notes.

 

 

 

4


 

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in millions)

(Unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net income

 

$

24.8

 

 

$

36.7

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1.1

)

 

 

0.6

 

Unrealized (losses) gains on securities:

 

 

 

 

 

 

 

 

(Losses) gains arising during the year

 

 

(24.7

)

 

 

34.1

 

Reclassification adjustment for gains included in net income

 

 

(12.5

)

 

 

(16.2

)

Other comprehensive (loss) income before tax

 

 

(38.3

)

 

 

18.5

 

Income tax provision related to other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized (losses) gains on securities:

 

 

 

 

 

 

 

 

(Losses) gains arising during the year

 

 

(4.0

)

 

 

9.8

 

Reclassification adjustment for gains included in net income

 

 

(2.3

)

 

 

(5.2

)

Income tax (benefit) provision related to other comprehensive income

 

 

(6.3

)

 

 

4.6

 

Other comprehensive (loss) income, net of tax

 

 

(32.0

)

 

 

13.9

 

Comprehensive (loss) income

 

$

(7.2

)

 

$

50.6

 

 

See accompanying notes.

 

 

5


 

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

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

(Unaudited)

 

 

 

Common

Shares

 

 

Additional

Paid-In

Capital

 

 

Treasury

Shares

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Shareholders'

Equity

 

Balance, December 31, 2016

 

$

40.0

 

 

$

1,123.3

 

 

$

(378.2

)

 

$

959.9

 

 

$

47.7

 

 

$

1,792.7

 

Net income

 

 

 

 

 

 

 

 

 

 

 

36.7

 

 

 

 

 

 

36.7

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13.9

 

 

 

13.9

 

Activity under stock incentive plans

 

 

0.2

 

 

 

3.3

 

 

 

 

 

 

 

 

 

 

 

 

3.5

 

Retirement of common shares

   (tax payments on equity

   compensation)

 

 

 

 

 

(4.2

)

 

 

 

 

 

 

 

 

 

 

 

(4.2

)

Deferred tax - share-based payments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock purchase plan

 

 

 

 

 

0.3

 

 

 

 

 

 

 

 

 

 

 

 

0.3

 

Cash dividend declared - common

   shares ($0.23/share)

 

 

 

 

 

 

 

 

 

 

 

(8.3

)

 

 

 

 

 

(8.3

)

Balance, March 31, 2017

 

$

40.2

 

 

$

1,122.7

 

 

$

(378.2

)

 

$

988.3

 

 

$

61.6

 

 

$

1,834.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

$

40.4

 

 

$

1,129.1

 

 

$

(423.4

)

 

$

977.0

 

 

$

96.6

 

 

$

1,819.7

 

Net income

 

 

 

 

 

 

 

 

 

 

 

24.8

 

 

 

 

 

 

24.8

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32.0

)

 

 

(32.0

)

Repurchase of common shares

   (314,586 at a weighted average

   price of $59.23)

 

 

 

 

 

 

 

 

 

 

(18.6

)

 

 

 

 

 

 

 

 

(18.6

)

Activity under stock incentive plans

 

 

0.2

 

 

 

4.4

 

 

 

 

 

 

 

 

 

 

 

 

4.6

 

Retirement of common shares

   (tax payments on equity

   compensation)

 

 

(0.1

)

 

 

(2.1

)

 

 

 

 

 

 

 

 

 

 

 

(2.2

)

Employee stock purchase plan

 

 

 

 

 

0.4

 

 

 

 

 

 

 

 

 

 

 

 

0.4

 

15% Stock Dividend

 

 

4.4

 

 

 

232.9

 

 

 

 

 

 

 

(237.3

)

 

 

 

 

 

 

 

 

Cash dividend declared - common

   shares ($0.27/share)

 

 

 

 

 

 

 

 

 

 

 

(9.3

)

 

 

 

 

 

(9.3

)

Cumulative effect of adoption of ASU 2016-01, net of taxes

 

 

 

 

 

 

 

 

 

 

 

117.5

 

 

 

(117.5

)

 

 

 

Cumulative effect of adoption of ASU 2018-02, net of taxes

 

 

 

 

 

 

 

 

 

 

 

(20.9

)

 

 

20.9

 

 

 

 

Balance, March 31, 2018

 

$

44.9

 

 

$

1,364.7

 

 

$

(442.0

)

 

$

851.8

 

 

$

(32.0

)

 

$

1,787.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

6


 

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

  

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

24.8

 

 

$

36.7

 

Adjustments to reconcile net income to net cash provided by (used in)

   operating activities:

 

 

 

 

 

 

 

 

Amortization and depreciation

 

 

6.1

 

 

 

8.3

 

Share-based payments expense

 

 

5.2

 

 

 

4.9

 

Deferred income tax (benefit) provision, net

 

 

(3.7

)

 

 

6.0

 

Net realized investment losses (gains)

 

 

15.7

 

 

 

(14.6

)

Undistributed earnings from alternative investment portfolio

 

 

(8.7

)

 

 

(8.3

)

Loss  on disposals of fixed assets, net

 

 

 

 

 

1.8

 

Change in:

 

 

 

 

 

 

 

 

Accrued investment income

 

 

(0.7

)

 

 

(0.9

)

Receivables

 

 

0.9

 

 

 

22.8

 

Deferred acquisition costs

 

 

(2.5

)

 

 

(6.1

)

Ceded unearned premiums

 

 

(93.8

)

 

 

(43.1

)

Reserves for losses and loss adjustment expenses

 

 

(42.7

)

 

 

23.3

 

Unearned premiums

 

 

47.7

 

 

 

7.3

 

Ceded reinsurance payable and funds held

 

 

133.9

 

 

 

(36.6

)

Income taxes

 

 

3.6

 

 

 

0.5

 

Accrued underwriting expenses

 

 

(3.8

)

 

 

(19.2

)

Other, net

 

 

71.6

 

 

 

(19.7

)

Cash provided by (used in) operating activities

 

 

153.6

 

 

 

(36.9

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Sales of fixed maturity investments

 

 

469.2

 

 

 

383.6

 

Maturities and mandatory calls of fixed maturity investments

 

 

144.8

 

 

 

182.1

 

Sales of equity securities

 

 

51.7

 

 

 

53.4

 

Sales of other investments

 

 

34.5

 

 

 

17.0

 

Purchases of fixed maturity investments

 

 

(616.5

)

 

 

(601.6

)

Purchases of equity securities

 

 

(60.1

)

 

 

(33.5

)

Purchases of other investments

 

 

(10.9

)

 

 

(9.3

)

Change in foreign regulatory deposits and voluntary pools

 

 

5.1

 

 

 

(5.2

)

Change in short-term investments

 

 

(166.1

)

 

 

125.5

 

Settlements of foreign currency exchange forward contracts

 

 

1.7

 

 

 

(2.8

)

Acquisition of Maybrooke, net of cash acquired

 

 

 

 

 

(83.1

)

Cash acquired with acquisition of Ariscom

 

 

15.6

 

 

 

 

Purchases of fixed assets

 

 

(6.4

)

 

 

(4.9

)

Other, net

 

 

8.9

 

 

 

3.6

 

Cash (used in) provided by investing activities

 

 

(128.5

)

 

 

24.8

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Additional long-term borrowings

 

 

 

 

 

125.0

 

Activity under stock incentive plans

 

 

0.2

 

 

 

0.2

 

Repurchase of Company's common shares

 

 

(18.6

)

 

 

 

Payment of cash dividends to common shareholders

 

 

(9.3

)

 

 

(8.3

)

Cash (used in) provided by financing activities

 

 

(27.7

)

 

 

116.9

 

Effect of exchange rate changes on cash

 

 

(0.3

)

 

 

(0.1

)

Change in cash

 

 

(2.9

)

 

 

104.7

 

Cash, beginning of year

 

 

176.6

 

 

 

86.0

 

Cash, end of period

 

$

173.7

 

 

$

190.7

 

 

See accompanying notes.

7


 

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 U.S. generally accepted accounting principles (“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, 2017, filed with the Securities and Exchange Commission on February 27, 2018.

Effective March 5, 2018, we acquired 100% of the capital stock of Ariscom Compagnia di Assicurazioni S.p.A. (“Ariscom”) upon its release from extraordinary administration by the Italian insurance supervisory authority (“IVASS”). The acquisition is being accounted for in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations.” See Note 3, “Acquisition of Ariscom,” for additional discussion regarding the acquisition. The Consolidated Financial Statements as of and for the three months ended March 31, 2018 and the Notes to the Consolidated Financial Statements reflect the consolidated results of Argo Group and Ariscom commencing on the date of acquisition.

The interim financial information as of, and for the three months ended March 31, 2018 and 2017 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.

 

15% Stock Dividend

 

On February 20, 2018, our Board of Directors declared at 15% stock dividend, payable on March 21, 2018, to shareholders of record at the close of business on March 7, 2018. As a result of the stock dividend, 4,397,520 additional shares were issued. Cash was paid in lieu of fractional shares of our common shares. Excluding repurchased shares, all references to common shares and related 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

On February 14, 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” that allows a reclassification from accumulated other comprehensive income to retained earnings of the stranded tax effects in AOCI resulting from the Tax Cuts and Jobs Act (“TCJA”). Current guidance required the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited directly to AOCI. The amount of the reclassification would include the effect of the change in the US federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of TCJA related to items in AOCI. The updated guidance is effective for reporting periods beginning after December 15, 2018 and is to be applied retrospectively to each period in which the effect of the TCJA related to items remaining in AOCI are recognized or at the beginning of the period of adoption. Early adoption is permitted, including adoption in any interim period for public business entities for reporting periods for which financial statements have not yet been issued. We have adopted the guidance effective January 1, 2018. The adoption of this ASU does not affect the Company’s results of operations, financial position, or liquidity. As a result of adopting this ASU, we reclassified $20.9 million of previously recognized deferred taxes from accumulated other comprehensive income into retained earnings as of January 1, 2018.

8


 

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation” (Topic 718): Scope of Modification Accounting. ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance requires entities to apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. In addition to all the disclosures about modifications that are required today, the entities are required to affirmatively disclose when compensation expense has not changed. The ASU is applied prospectively and is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. We have adopted this ASU effective January 1, 2018. The adoption of this ASU did not have a material impact on our financial results and disclosures.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other” (Topic 350). ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill that is done in Step 2 of the current goodwill impairment test to measure a goodwill impairment loss. Instead, entities will record an impairment loss based on the excess of a reporting unit’s carrying amount over its fair value. The guidance will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. We do not anticipate that this ASU will have a material impact on our financial results or disclosures.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations” (Topic 805). ASU 2017-01 clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance specifies the minimum inputs and processes required to meet the definition of a business. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within the year of adoption. We have adopted this ASU effective January 1, 2018. The adoption of this ASU did not have a material impact on our financial results and disclosures.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” This ASU 2016-16 simplifies the income tax accounting of intra-entity transfers of an asset other than inventory by requiring an entity to recognize the income tax effect when the transfer occurs. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods and early adoption is permitted. We early adopted this ASU in 2017, and the adoption resulted in intercompany transfers being tax effected.

In August 2016, the FASB issued 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 the year of adoption. This ASU will have an impact on how we present the distributions received from equity method investees in our statement of cash flows. We have adopted this ASU effective January 1, 2018. This ASU did not have a material impact on the classification of specific cash receipts and payments within the cash flow statement.

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 the year of adoption. The guidance requires a modified retrospective transition method and early adoption is permitted. We are currently evaluating the impact that the adoption of the ASU will have on our financial results and disclosures, but do not anticipate that any such potential impact would be material.

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, the ASU modifies current guidance for lessors' accounting. The ASU is effective for interim and annual reporting periods beginning on or after January 1, 2019, with early adoption permitted. We do not anticipate that this ASU will have a material impact on our results of operations, but we anticipate an increase to the value of our assets and liabilities related to leases, with no material impact to equity.

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 related to an available-for-sale debt security in combination with our other deferred tax assets. The ASU will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We have adopted this ASU effective January 1, 2018. Upon adoption of this ASU, cumulative net unrealized gain on equity securities of $117.5 million, net of deferred income taxes were reclassified from accumulated other comprehensive income into retained earnings as of January 1, 2018. The change in the fair value of the noted investments is now included in “Net realized investment gains” in our consolidated statements of income. The standard increases the volatility of the results reported in our consolidated statements of income, resulting from the remeasurement of our equity investments.

9


 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606), which replaces most existing U.S. 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. 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 implementations;

 

ASU 2016-10, “Identifying Performance Obligations and Licensing” (Topic 606), which is intended to clarify the guidance for identifying promised goods or service 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” (Topics 605 & 815);

 

ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients” (Topic 606), provides additional guidance for quantitative and qualitative disclosures in certain cases, and makes 12 additional technical corrections and improvements to the new revenue standard.

We adopted this ASU effective January 1, 2018. The adoption of this standard did not have a material impact on our consolidated financial results.

 

3.

Acquisition of Ariscom

Effective March 5, 2018, we acquired 100% of the capital stock of Ariscom upon its release from extraordinary administration by IVASS. We injected an amount of capital into Ariscom necessary to meet certain regulatory requirements and thresholds. As part of this capital infusion, we have become the sole shareholder of Ariscom.

The acquisition provides Argo Group with an existing Italian insurance platform and access to Ariscom’s broker and client network throughout Italy, with longer-term opportunities to expand our presence in continental Europe, particularly Spain and Portugal.

The acquisition is being accounted for in accordance with ASC 805, “Business Combinations.” Purchase accounting, as defined by ASC 805, requires that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. We are in the process of finalizing our determination of fair values, including an independent appraisal of certain assets and liabilities, including intangible assets. We anticipate closing the fair value measurement period during the third quarter of 2018. Ariscom’s financial position, results of operations, and cash flows were not material to our consolidated financial results as of and for the three months ended March 31, 2018.

 

 

10


 

4.

Investments

Composition of Invested Assets

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

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Governments

 

$

374.2

 

 

$

0.2

 

 

$

7.4

 

 

$

367.0

 

Foreign Governments

 

 

233.0

 

 

 

3.9

 

 

 

3.5

 

 

 

233.4

 

Obligations of states and political subdivisions

 

 

315.9

 

 

 

6.6

 

 

 

2.0

 

 

 

320.5

 

Corporate bonds

 

 

1,580.7

 

 

 

15.0

 

 

 

24.1

 

 

 

1,571.6

 

Commercial mortgage-backed securities

 

 

103.5

 

 

 

 

 

 

2.3

 

 

 

101.2

 

Residential mortgage-backed securities

 

 

341.5

 

 

 

2.3

 

 

 

8.1

 

 

 

335.7

 

Asset-backed securities

 

 

165.6

 

 

 

1.0

 

 

 

1.3

 

 

 

165.3

 

Collateralized loan obligations

 

 

192.3

 

 

 

4.8

 

 

 

0.3

 

 

 

196.8

 

Total fixed maturities

 

 

3,306.7

 

 

 

33.8

 

 

 

49.0

 

 

 

3,291.5

 

Equity securities

 

 

358.3

 

 

 

131.9

 

 

 

13.7

 

 

 

476.5

 

Other investments

 

 

513.7

 

 

 

9.6

 

 

 

 

 

 

523.3

 

Short-term investments

 

 

542.4

 

 

 

 

 

 

0.2

 

 

 

542.2

 

Total investments

 

$

4,721.1

 

 

$

175.3

 

 

$

62.9

 

 

$

4,833.5

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Governments

 

$

419.9

 

 

$

0.2

 

 

$

5.0

 

 

$

415.1

 

Foreign Governments

 

 

229.0

 

 

 

6.7

 

 

 

2.5

 

 

 

233.2

 

Obligations of states and political subdivisions

 

 

327.7

 

 

 

9.3

 

 

 

1.1

 

 

 

335.9

 

Corporate bonds

 

 

1,514.5

 

 

 

24.4

 

 

 

13.2

 

 

 

1,525.7

 

Commercial mortgage-backed securities

 

 

136.3

 

 

 

0.1

 

 

 

1.5

 

 

 

134.9

 

Residential mortgage-backed securities

 

 

309.3

 

 

 

2.8

 

 

 

2.7

 

 

 

309.4

 

Asset-backed securities

 

 

161.3

 

 

 

0.7

 

 

 

0.8

 

 

 

161.2

 

Collateralized loan obligations

 

 

222.6

 

 

 

5.9

 

 

 

0.5

 

 

 

228.0

 

Total fixed maturities

 

 

3,320.6

 

 

 

50.1

 

 

 

27.3

 

 

 

3,343.4

 

Equity securities

 

 

338.2

 

 

 

154.0

 

 

 

4.8

 

 

 

487.4

 

Other investments

 

 

534.1

 

 

 

9.6

 

 

 

0.1

 

 

 

543.6

 

Short-term investments

 

 

368.5

 

 

 

 

 

 

 

 

 

368.5

 

Total investments

 

$

4,561.4

 

 

$

213.7

 

 

$

32.2