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Section 1: 10-K (ARGO GROUP INTERNATIONAL HOLDINGS, LTD. FORM 10-K - DECEMBER 31, 2018)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Security
Common Stock, par value of $1.00 per share
Guarantee of Argo Group U.S., Inc.  6.500% Senior Notes due 2042
 
Name of Each Exchange on Which Registered
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
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  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨ 
Smaller reporting company ¨
Emerging growth company ¨
If an emerging growth company, indicate by check mark if 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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
As of June 30, 2018, the aggregate market value of the common stock held by non-affiliates was approximately $1,926.0 million.
As of February 21, 2019, the Registrant had 33,969,883 shares of common stock outstanding (less treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Excerpts from Argo Group International Holdings, Ltd.’s Proxy Statement for the 2019 Annual Meeting of Shareholders.


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ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
Annual Report on Form 10-K
For the Year Ended December 31, 2018
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Forward Looking Statements
Certain statements in this document are “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 and are made pursuant to the safe harbor provisions of that act. Some of the forward-looking statements can be identified by the use of forward-looking words such as “believes”, “expects”, “potential”, “continued”, “may”, “will”, “should”, “seeks”, “approximately”, “predicts”, “intends”, “plans”, “estimates”, “anticipates” or the negative version of those words or other comparable words. The forward-looking statements are based on the current expectations of Argo Group International Holdings, Ltd. (“Argo Group,” “we” or the “Company”) and our beliefs concerning future developments and their potential effects on Argo Group. There can be no assurance that actual developments will be those anticipated by Argo Group. Actual results may differ materially as a result of significant risks and uncertainties including but not limited to:
changes in the pricing environment including those due to the cyclical nature of the insurance and reinsurance industry;
increased competition;
the adequacy of our projected loss reserves including:
development of claims that varies from that which was expected when loss reserves were established;
adverse legal rulings which may impact the liability under insurance and reinsurance contracts beyond that which was anticipated when the reserves were established;
development of new theories related to coverage which may increase liabilities under insurance and reinsurance contracts beyond that which were anticipated when the loss reserves were established;
reinsurance coverage being other than what was anticipated when the loss reserves were established;
changes to regulatory and tax conditions and legislation;
natural and/or man-made disasters, including terrorist acts;
impact of global climate change;
the inability to secure reinsurance;
the inability to collect reinsurance recoverables;
a downgrade in our financial strength ratings;
changes in interest rates;
changes in the financial markets that impact investment income and the fair market values of our investments;
changes in asset valuations;
failure to execute information technology strategies;
exposure to information security breach;
failure of outsourced service providers;
failure to execute expense targets;
inability to successfully execute mergers or acquisitions; and
other risks detailed in this Form 10-K or that may be detailed in other filings with the Securities and Exchange Commission.
These risks and uncertainties are discussed in greater detail in Item 1A, “Risk Factors.” We undertake no obligation to publicly update any forward-looking statements.


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PART I
Item 1. Business
Business Overview
Argo Group International Holdings, Ltd. is an international underwriter of specialty insurance and reinsurance products in the property and casualty market. We target niches where we can develop a leadership position and where we believe we will generate superior underwriting profits. Our growth has been achieved both organically – through an operating strategy focused on disciplined underwriting – and as a result of strategic acquisitions.
The following is a summary organizational chart of Argo Group:
396875022_a201810korgchart.jpg
Business Segments and Products
For the year ended December 31, 2018, our operations included two reportable segments – U.S. Operations and International Operations. In addition to these main business segments, we have a Run-off Lines segment for certain products we no longer underwrite. For discussion of the operating results of each business segment, please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 19, “Segment Information,” in the Notes to the Consolidated Financial Statements.
U.S. Operations
This segment is a leader in the U.S. Specialty Insurance market, specifically through its Excess and Surplus Lines ("E&S") businesses focusing on U.S.-based risks that the standard, admitted insurance market is unwilling or unable to underwrite, and through other specialized admitted and non-admitted business distributed through retail, wholesale, and managing general brokers/agents in the Specialty Insurance market. The standard insurance market’s limited appetite for such coverage is often driven by the insured’s unique risk characteristics, the perils involved, the nature of the business, and/or the insured’s loss experience.

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The E&S businesses are often able to underwrite risks using more flexible policy terms and rating structures. The other U.S. businesses use their underwriting expertise in specific industry classes or exposures to write niche classes of business primarily in the admitted insurance market.
Our Excess and Surplus Lines businesses operate primarily through the Colony Specialty platform. While focused primarily on non-admitted business, Colony Specialty may also underwrite certain classes of business on an admitted basis.
Colony Specialty underwrites primary and excess casualty, property, and other coverage for hard-to-place risks and/or distressed businesses that typically fall outside of the standard insurance market’s risk appetite. This business is underwritten through the following business units: Casualty (which includes Construction), Transportation, Property, Contract and Environmental. Through these units, Colony Specialty provides coverage to a broad group of commercial enterprises, including contractors, manufacturers, distributors, property owners, retailers, restaurants and environmental consultants.
Our other, primarily admitted business units target classes and industries with distinct risk profiles that can benefit from specially designed insurance coverage, tailored loss control and expert claims handling. Under this focus, U.S. Operations includes the following business units: Argo Pro, Argo Insurance, Rockwood Casualty Insurance Company (“Rockwood”), U.S. Specialty Programs, Inland Marine, Argo Surety and Trident Public Risk Solutions (“Trident”).
Argo Pro
Argo Pro is our mid-market professional lines platform that provides a broad portfolio of errors and omission, and management liability products to our wholesale and retail distribution partners. Argo Pro offers customized coverage on a primary and excess basis for risks on both an admitted and non-admitted basis, targeting commercial and select financial institution risks in the middle market and upper middle market segments. Our underwriting focus provides risk management solutions for accountants, architects and engineers, commercial crime, directors and officers, employment practices, fiduciary, lawyers, miscellaneous professionals, technology, privacy and security.
Argo Insurance
Argo Insurance offers insurance and risk management services to grocery, restaurants and other specialty retail industries. Using specific risk-control tools, Argo Insurance provides property, liability, workers compensation, automobile and umbrella coverage to accounts throughout the United States, primarily on a large deductible and self-insured retention basis.
Rockwood
Rockwood is primarily a specialty underwriter of workers compensation for the mining industry. It also underwrites coverage for small commercial businesses, including retail operations, light manufacturing, services and restaurants. Approximately 45% of its premiums are written in Pennsylvania. Rockwood underwrites policies on both a large-deductible basis and on a guaranteed-cost basis for smaller commercial accounts. In addition, Rockwood provides general liability and commercial automobile coverage, as well as coverage for pollution liability, umbrella liability, and surety to support its core clients’ other mining and mining-related exposures.
U.S. Specialty Programs
U.S. Specialty Programs offers specialized commercial niche programs customized to meet the specific insurance needs of targeted businesses. This unit provides solutions crafted specifically for each program opportunity. Its internal and external network includes experienced program administrators with successful track records with specialized underwriting expertise.
Inland Marine
The Inland Marine business unit offers insurance coverage in the U.S. for builders risk, motor-truck cargo, equipment, and other miscellaneous marine risks. Coverage is provided on a monoline basis with both primary and excess coverages available.
Argo Surety
Argo Surety provides surety solutions to businesses that must satisfy various eligibility conditions in order to conduct commerce, such as licensure requirements required by government statute or regulation, counterparty conditions found in private or public construction projects, or satisfactory performance of contracted services. Surety products are commonly grouped into two broad categories referred to as commercial bonds and contract bonds. Commercial bonds are generally required of businesses that guarantee their compliance with regulations and statutes, the payment and performance assurance for various forms of contractual obligations, or the completion of services. Contract bonds are typically third-party performance, payment or maintenance guarantees associated with construction projects. Argo Surety primarily writes Commercial bonds targeting multiple industries, including construction (general, trade and service

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contractors), manufacturing, transportation, energy (coal, oil and gas), waste management, industrial equipment, technology, retail, public utilities and healthcare.
Trident Public Risk Solutions
Trident provides primary insurance products and risk management solutions for public-sector entities such as counties, municipalities, public schools, and other local government units and special districts. Its product lines include general liability, automobile liability, automobile physical damage, property, inland marine, crime, public officials liability, educators legal liability, employment practices liability, law enforcement liability and workers compensation coverage.
International Operations
This segment specializes in insurance and reinsurance risks worldwide through the broker market, focusing on specialty property insurance, property catastrophe reinsurance, primary/excess casualty and professional liability insurance. This segment includes a multi-class Lloyd’s Syndicate platform, a strong Bermuda trading platform and growing businesses in Continental Europe and Brazil.
This segment operates as ArgoGlobal in addition to other brands depending on product and jurisdiction, including Ariel Re, Argo Re, the Casualty and Professional Lines unit of Argo Insurance Bermuda, ArgoGlobal SE in Continental Europe, ArgoGlobal Assicurazioni (“ArgoGlobal Assicurazioni”) S.p.A in Italy and Argo Seguros Brazil, S.A. (“Argo Seguros”) in Brazil.
Lloyd’s Syndicate Platform
Argo’s Lloyd’s Syndicate platform includes Syndicate 1200 and Syndicate 1910. Based in London, the syndicates have regional operations in Bermuda, Dubai, Singapore and Shanghai. The syndicates are managed by the Argo Managing Agency and trade under the Lloyd’s of London capital and licensing framework.
Syndicate 1200 is focused on underwriting worldwide property, non-U.S. liability, marine and energy and specialty insurance. The property division of Syndicate 1200 concentrates mainly on North American commercial properties, but is also active in the residential sector, including collateral protection insurance programs for lending institutions. A portion of business is underwritten through the use of binding authorities, whereby we delegate underwriting authority to another party, usually a broker or underwriting agent. The liability division underwrites professional indemnity, general liability, medical malpractice, casualty and motor treaty, directors and officers and cyber insurance with emphasis on Canada, Australia and the U.K. The marine and energy division underwrites cargo, upstream and downstream energy, hull and marine liability insurance. The specialty division underwrites personal accident, credit and political risks, livestock and contingency insurance.
Approximately one half of Syndicate 1200's underwriting capital is related to third parties, including other (re)insurance groups (“trade capital”) and high net worth individuals (“Names”) who want to participate in our underwriting. Trade capital providers participate on a quota share basis behind an Argo-owned corporate member or directly through their own member. The flexibility in the sources of capital allows us to manage underwriting exposure over the insurance cycle. Our economic participation in the syndicate varies by year of account based on our risk appetite and the availability of third party capital. This business earns a return on the underwriting capital that is provided by us and from fee income earned from the management of third-party capital.
Syndicate 1910 underwrites reinsurance through our reinsurance division, Ariel Re, which operates in two areas - treaty property and specialty, and property insurance exposures through Argo Insurance Bermuda, a division of Argo Re. Treaty property reinsurance is predominantly catastrophe-focused. Specialty reinsurance encompasses marine, energy, aviation, terrorism and property. This reinsurance portfolio is focused on treaties where high-quality exposure and experience data allow our underwriters to quantify the risk. The property insurance business is focused on mainly North American commercial properties and writes on both a primary and excess basis. Business is written on an open market basis through retail and wholesale brokers.
Syndicate 1910 also obtains a portion of its underwriting capital from third party sources and seeks to maintain a balance between capital provided by us and capital managed on behalf of third parties. The sources of the underwriting capital for Syndicate 1910 include our interest and capital from trade capital and Names. The flexibility in the sources of capital allows us to manage underwriting exposure over the insurance cycle. Our economic participation in the syndicate varies by year of account based on our risk appetite and the availability of third-party capital.
Bermuda Insurance, Europe and Brazil
The additional international businesses include Argo Insurance Bermuda, ArgoGlobal SE, ArgoGlobal Assicurazioni in Italy and Argo Seguros business in Brazil.

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Argo Insurance Bermuda offers casualty, property and professional lines, which serves the needs of global clients by providing the following coverages: property, general and products liability, directors and officers liability, errors and omissions liability and employment practices liability.
ArgoGlobal SE is based in Malta and underwrites professional liability, surety, and property and casualty business in continental Europe.
ArgoGlobal Assicurazioni is a specialty underwriter of property, marine, accident & health and liability insurance in the European market with a focus on Italy and Southern Europe.
Argo Seguros is our property and casualty insurance company based in Sao Paolo, Brazil, which is focused on serving that country’s domestic commercial insurance market. Argo Seguros provides a broad range of commercial property, casualty and specialty coverages. Its primary lines of business are cargo and marine, property, and engineering and financial lines.
Run-off Lines
The Run-off Lines segment includes outstanding liabilities associated with discontinued lines previously underwritten by our insurance subsidiaries, such as those arising from liability policies dating back to the 1960s, 1970s and into the 1980s; risk management policies written by a business unit that has since been sold to a third party; and other legacy accounts previously written by our reinsurance subsidiaries.
Marketing and Distribution
We provide products and services to well-defined niche markets. We use our capital strength and the Argo Group brands to cross-market the products offered by our segments among our operating platforms and divisions. We offer our distribution partners tailored, innovative solutions for managing risk using the full range of products and services we have available.
U.S. Operations
Within U.S. Operations, Colony Specialty distributes its products through a network of appointed wholesale agents and brokers specializing in excess and surplus lines and certain targeted admitted lines. Approximately two-thirds of Colony Specialty’s premium volume in 2018 was produced by wholesale brokers who submit business and rely on Colony Specialty to produce quotes and handle policy issuance on such accounts. The remaining one-third of Colony Specialty’s premium was produced through a select group of wholesale agents to whom Colony Specialty has delegated limited authority to act on its behalf. These agents are granted authority to underwrite, quote, bind and issue policies in accordance with predetermined guidelines and procedures prescribed by Colony Specialty.
The remainder of the U.S. business uses a broad distribution platform to deliver specialty insurance products and services to our policyholders and agents. Argo Pro distributes its products through wholesale agents, brokers and retail agents. Argo Insurance products and services are distributed through select retail agents, brokers, wholesale agents and program managers with demonstrated expertise. Rockwood distributes its product lines through its network of retail and wholesale agents. U.S. Specialty Programs provides its products through selected managing general agents ("MGAs") and brokers.  Inland Marine uses selected retail agents and brokers. Trident provides its insurance products and related services through select retail agents, brokers and state program managers. Argo Surety distributes its products through select surety specialty agents and brokers across the United States.
International Operations
Syndicate 1200 obtains its insurance business from two main sources: the Lloyd’s open market and underwriting agencies with delegated authority. In the Lloyd’s open market, brokers approach Syndicate 1200 directly with risk opportunities for consideration by our underwriters. Brokers also approach Syndicate 1200 on behalf of selected underwriting agencies that are granted limited authority delegated by the Syndicate 1200 to make underwriting decisions on these risks. In general, risks written in the open market are larger than risks written on our behalf by authorized agencies in terms of both exposure and premium.
Syndicate 1910 originates business directly through our Lloyd's platform, as well as business originated outside of Lloyd's. All of our reinsurance ultimately resides in Syndicate 1910 through our internal capital framework, including the use of intercompany quota share arrangements.
The additional International Operations’ businesses obtain business through brokers and third-party intermediaries. The businesses' marketing and distribution strategies are based on territories with employees in countries around the world, including: the United Kingdom, Bermuda, Belgium, France, Germany, Brazil, Switzerland, Malta and an office in the United States (Miami) serving the offshore needs of the Latin American market.

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Competition
We compete in a wide variety of markets against numerous and varied competitors, depending on the nature of the risk and coverage being written. The competition for any one account may range from large international firms to smaller regional companies in the domiciles in which we operate.
To remain competitive, our strategy includes, among other elements: (1) focusing on rate adequacy and underwriting discipline while providing a competitively priced product; (2) leveraging our distribution network by providing product solutions; (3) controlling expenses; (4) maintaining financial strength and issuer credit ratings; (5) providing quality services to agents and policyholders, including claims handling, rate, quote, bind and issue technologies to make it easier to write business; and (6) exploiting opportunities to acquire suitable books of business.
U.S. Operations
Competition within the excess and surplus lines marketplace comes from a wide range of national and global carriers. In addition to mature companies that operate nationwide, competition comes from carriers formed in recent years. The Excess and Surplus Lines businesses may also compete with national and regional carriers from the standard market that are willing to underwrite policies on selected accounts on an admitted basis.
Due to the diverse nature of the products offered by our other U.S. Operations businesses, competition comes from various sources, but largely from regional companies or specific units / subsidiaries of national carriers. National carriers tend to compete for larger accounts along all product lines. Competition for Trident comes from a wide range of commercial insurers, but also from state and regional governmental risk pools.
International Operations
Competition for any one account may come from other Lloyd’s syndicates, international firms or smaller regional companies. These competitors include independent insurance and reinsurance companies, subsidiaries or affiliates of established worldwide insurance companies, departments of certain commercial insurance companies, and underwriting syndicates.
Ratings
Ratings are an important factor in assessing our competitive position and our ability to meet our ongoing obligations. Ratings are not a recommendation to buy, sell or hold any security, and they may be revised or withdrawn at any time by the agency providing such a rating. Moreover, the ratings of each agency should be evaluated independently as the rating methodology and evaluation process may differ. The ratings issued on us or our subsidiaries by any of these agencies are announced publicly and are available on our website and the respective rating agency’s websites. We have two types of ratings: (i) Financial Strength Ratings (“FSR”) and (ii) Debt Ratings or Issuer Credit Ratings (“ICR”).
Financial Strength Ratings reflect the rating agency’s assessment of an insurer’s ability to meet its financial obligations to policyholders. With the exception of Argo Seguros (which is not rated), all of our insurance and reinsurance companies have an FSR of “A” (Excellent) from A.M. Best Company (“A.M. Best”), and our U.S. insurance subsidiaries have an FSR of “A-” (Strong) from Standard & Poor’s (“S&P”), with positive outlook.
Debt Ratings and Issuer Credit Ratings reflect the rating agency’s assessment of a company’s prospects for repaying its debts and can be considered by lenders in connection with the setting of interest rates and terms for a company’s short-term or long-term borrowings. Argo Group U.S., Inc. has an ICR and senior unsecured debt rating of “BBB-” from S&P. Argo Group International Holdings, Ltd. has an ICR and senior unsecured Debt Rating of “bbb” from A.M. Best. Except for ARIS Title and Argo Seguros, all of our insurance and reinsurance companies have an ICR of “a” from A.M. Best.
A.M. Best Financial Strength Ratings range from “A++” (Superior) to “S” (Suspended) and include 16 separate ratings categories. S&P Financial Strength Ratings range from “AAA” (Extremely Strong) to “R” (under regulatory supervision) and include 21 separate ratings categories.
Syndicates 1200 and 1910, our Lloyd’s syndicates, operate with the Lloyd’s market FSR rating of “A” (Excellent) with a stable outlook by A.M. Best and “A+” (Strong) with a negative outlook by S&P.

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Regulation
General
The business of insurance and reinsurance and related services is regulated in most countries, although the degree and type of regulation varies from one jurisdiction to another. The principal jurisdictions in which our insurance and reinsurance businesses operate are Bermuda, various state regulators in the United States, the European Union (“EU”), the United Kingdom and Brazil. We are also regulated by other countries and jurisdictions where we do business. Our group regulatory supervisor is the Bermuda Monetary Authority ("BMA").
Bermuda
Insurance Company and Insurance Group Supervision and Regulation Scheme
Many of Bermuda’s insurance groups subject to supervision are internationally active. Therefore, Bermuda’s group supervision framework reflects international developments in this area and principles for insurance group supervision adopted by the International Association of Insurance Supervisors.
Based on the Bermuda Insurance Act 1978 (“the Insurance Act”), as amended from time to time, Bermuda maintains a progressive, risk-based supervisory system for registered Insurance Companies and for selected Insurance Groups.
A number of Bermuda registered (re)insurers operate within a group structure, meaning that a local insurer’s financial position and risk profile, and its overall prudential position, may be impacted by being part of a group, both positively and negatively. Therefore, the BMA has established a group supervision framework for insurance groups. The BMA conducts its responsibilities and powers as Group Supervisor under the Insurance Act, and the supporting legislation, the Insurance (Group Supervision) Rules 2011 and the Insurance (Prudential Standards) (Insurance Groups Solvency Requirement) Rules 2011.
The main objectives of group supervision include (a) policyholder protection, (b) ensuring at least one supervisor has an overall view of the group and its associated risks and (c) addressing any supervisory gaps, the risk of contagion and the impact of any unregulated entities within a group. Therefore, key areas of focus within the group supervision framework are (1) ensuring solvency at group level, (2) monitoring inter-group transactions and (3) assessing corporate governance, risk management and internal control processes of insurance groups. In conducting its function as Group Supervisor, the BMA, among other things, convenes and conducts supervisory colleges with other supervisory authorities that have regulatory oversight of entities within a group and coordinates the gathering and dissemination of relevant or essential information from groups for going concern or emergency situations.
In May 2011, the BMA gave notice that it had determined itself to be the proper group supervisor for us for purposes of its Group Supervision regime, and nominated Argo Re to serve as the designated insurer. Accordingly, we and our subsidiaries are deemed to be an affiliated group supervised by the BMA under applicable rules and regulations in Bermuda.
In 2018, the BMA, convened its annual supervisory college sessions relative to Argo Group, which included participation by the U.K. Prudential Regulatory Authority and the Insurance Departments of the States of Illinois and Virginia. Argo Group management was also asked to attend and to make a presentation.
The BMA is also responsible for the supervision, regulation and inspection of Bermuda domiciled insurance companies and for the licensing of all insurance companies, brokers, agents and managers doing business in Bermuda. The Insurance Act and its supporting legislation, the Insurance (Prudential Standards) (Class 4 and 3B Solvency Requirement), the Insurance (Eligible Capital) Rules, as well as various other policies and guidance notes, including the Insurance Code of Conduct, provide the BMA with substantive licensing and intervention powers.
These rules provide for significant reporting requirements related to us and our consolidated financial condition.
Solvency Regulation Scheme
Bermuda continues to enhance its risk-based regulatory regime, to meet or exceed international standards, including Solvency II (“S II”) as enacted by the EU in November 2009. On March 24, 2016, the European Commission’s recommendation that Bermuda achieve full Solvency II equivalence was confirmed in the Official Journal of the European Union, with retroactive application to January 1, 2016. The European Commission announced its approval of Bermuda’s commercial (re)insurance regime as being fully equivalent to the regulatory standards applied under S II.
Many of the areas covered under this initiative have been phased in over recent years. The BMA has enhanced its existing regime consisting of three core components: (1) Capital Adequacy, (2) Governance and Risk Management and (3) Disclosure and Reporting. Most of these

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core components are interconnected and potentially influenced by developments in other international regimes. Insurance companies as well as insurance groups are also subject to the Bermuda Solvency Capital Requirement (“BSCR”), a risk-based capital system mandated by the above mentioned rules.
Regulation of Argo Re
Classification of Insurers
The Insurance Act distinguishes between special purpose insurers, insurers operating a long-term business and insurers operating a general business. There are various classifications of insurers operating a general business, with Class 4 insurers subject to the highest level of regulation. Argo Re, which is incorporated to operate a general insurance and reinsurance business, is registered as a Class 4 insurer in Bermuda and is regulated as such under the Insurance Act. Under the Insurance Act, no distinction is made between insurance and reinsurance business.
Principal Representative and Principal Office
As an insurer, Argo Re is required to maintain a principal office and to appoint and maintain a principal representative in Bermuda. The principal representative is required to give notice to the BMA regarding certain events relating to solvency, significant losses, proposed changes in ownership, changes in membership of the Board of Directors or our senior management, and other material changes defined in the Insurance Act. In some instances, prior approval may be required for a proposed action that is the subject of a notice.
Controlling Shareholders of an Insurer; Effect on Ownership of Shares in the Company
The definition of a “shareholder controller” is set out in the Insurance Act, but generally refers to a person who holds 10% or more of the shares carrying rights to vote at a shareholders’ meeting of the registered insurer or its parent company. More stringent requirements apply at certain thresholds to those holding, directly or indirectly, 10% or more.  The BMA also has the power under the Insurance Act, at any time, by written notice, to object to any “controller” (including a shareholder controller) if it appears to the BMA that such person is not a fit and proper person to be such a controller.  The BMA may require a shareholder controller to reduce its holding of our common shares and direct, among other things, that voting rights attaching to the common shares shall not be exercisable.
Dividends
Any dividend payments to Argo Re become part of the capital and surplus of Argo Re, at which point further upward distribution to Argo Group is subject to Bermuda insurance and solvency regulations as discussed above.
In 2018 and 2016, Argo Re paid a cash dividend of $36.5 million and $41.0 million, respectively to Argo Group. The proceeds of the dividends were used to repay intercompany balances related primarily to the funding of dividend and interest payments and other corporate expenses. In 2017, Argo Re did not pay a dividend to Argo Group.
Financial Condition Report
In 2018, Argo Group filed a Financial Condition Report (“FCR”) with the BMA and on its public website under the Insurance (Public Disclosure) Rules 2015 pursuant to the Insurance Act. The purpose of this Financial Condition Report for Argo Group is to provide a public disclosure of the measures governing the Company’s business operations, corporate governance framework, solvency, financial performance and management of significant events. The FCR was reviewed by the Bermuda Monetary Authority and posted on the Argo public website in June 2018. The FCR is an annual filing and provides additional information to the public in relation to the Company’s business model. The 2018 FCR was used to meet new NAIC Corporate Governance Annual Disclosures ("CGAD") reporting requirements applying to Argo Group U.S. as a result of the passing of the CGAD Model Act. It is anticipated this will be repeated for the 2019 filing.
United States
State Insurance Regulation
Argo Group U.S., Inc.’s insurance subsidiaries are subject to the supervision and regulation of the states in which they are domiciled. We currently have twelve insurance companies domiciled in five states (the “U.S. Insurance Entities”). Argo Group U.S., Inc., as the parent of the U.S. Insurance Entities, is subject to the insurance holding company laws of Illinois, New York, Ohio, Pennsylvania and Virginia. These laws generally require each of the U.S. Insurance Entities to submit annual holding company registration statements to its respective domestic state insurance departments and to furnish annual financial and other information about the operations of the companies within the holding company group, including the filing of an Own Risk and Solvency Assessment Summary Report with the Illinois Director of Insurance, as the lead state regulator. In order to assess the business strategy, financial position, legal and regulatory position, risk

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exposure, risk management, and governance processes, the Illinois Director of Insurance may participate in a supervisory college with other regulators who are interested in the supervision of an Illinois domestic insurer or its affiliates, including other state, federal, and international regulatory agencies. Generally, all material transactions among companies in the holding company group to which any of the U.S. Insurance Entities is a party, including sales, loans, reinsurance agreements and service agreements, must be fair and, if material or of a specified category, require prior notice and approval by the insurance department where the subsidiary is domiciled. Transfers of assets among such affiliated companies, certain dividend payments from insurance subsidiaries and certain material transactions between companies within the holding company group may be subject to prior notice to, or prior approval by, state regulatory authorities in the domiciliary states. Such supervision and regulation is intended to primarily protect our policyholders. Matters relating to authorized lines of business, underwriting standards, financial condition standards, licensing of insurers, investment standards, premium levels, policy provisions, the filing of annual and other financial reports prepared on the basis of Statutory Accounting Principles, the filing and form of actuarial reports, dividends and a variety of other financial and non-financial matters are also areas that are regulated and supervised by the states in which our U.S. Insurance Entities are domiciled.
Cyber Regulations
The New York Department of Financial Services ("NYDFS") issued Cybersecurity Regulations for Financial Services Companies that require certain of our insurance operations to, among other things, establish and maintain a cybersecurity policy, a cybersecurity breach incident response process and to designate a Chief Information Security Officer. These Regulations first came into effect in 2017 with a two -year transition period. In addition, the NAIC adopted the Insurance Data Security Model Law in October 2017. The purpose of this Model Law is to establish recommended standards for data security and for the notification to insurance commissioners of cybersecurity incidents involving unauthorized access to, or the misuse of, certain non-public information.
Guaranty Associations
Our licensed U.S. Insurance Entities are participants in the statutorily created insolvency guaranty associations in all states where they are licensed carriers. These associations were formed for the purpose of paying return of unearned premium and claims of licensed insolvent insurance companies. The licensed U.S. Insurance Entities are assessed their pro rata share of such guaranty fund payments based upon their written premiums, subject to a maximum annual assessment per line of insurance. Such assessments costs may be recovered, in certain jurisdictions, through the application of surcharges on future premiums or premium tax offsets. Except in the state of New Jersey, non-admitted business is neither supported by nor subject to guaranty assessments.
Dividends
All of the U.S. Insurance Entities are subsidiaries of Argo Group U.S., Inc., meaning that any dividends from the U.S. Insurance Entities are payable in the first instance to Argo Group U.S., Inc. prior to being passed upward as dividends to Argo Group. The ability of our U.S. Insurance Entities to pay dividends is subject to certain restrictions imposed by the jurisdictions of domicile that regulate our U.S. Insurance Entities and each such jurisdiction imposes limitations upon the amount of dividends that an insurance company may pay without the approval of its insurance regulator.
Argo Group U.S., Inc. may receive dividends from its direct subsidiaries: Argonaut Insurance Company and Rockwood Casualty Insurance Company. During 2019, Argonaut Insurance Company may be permitted to pay dividends up to $89.6 million without approval from the Illinois Department of Insurance, based on the application of the Illinois ordinary dividend calculation. Rockwood may be permitted, during 2019, to pay dividends up to $12.6 million without approval from the Pennsylvania Department of Insurance, based on the application of Pennsylvania’s ordinary dividend calculation. For the year ended December 31, 2018, Rockwood paid an ordinary dividend to Argo Group U.S., Inc. in the amount of $20.0 million. Business and regulatory considerations may impact the amount of dividends actually paid, and prior regulatory approval of extraordinary dividend payments is required.
State laws require prior notice or regulatory approval of direct or indirect changes in control of an insurer, reinsurer or its holding company, and certain significant inter-corporate transfers of assets within the holding company structure. An investor who acquires or attempts to acquire shares representing or convertible into more than 10% of the voting power of the securities of Argo Group would become subject to at least some of these laws, would be required to obtain approval from the five domiciliary regulators of the U.S. Insurance Entities prior to acquiring such shares and would be required to file certain notices and reports with the five domiciliary regulators prior to such acquisition.
The Terrorism Risk Insurance Program Reauthorization Act
On November 26, 2002, the President of the United States signed into law the Terrorism Risk Insurance Act of 2002 (“TRIA”).  On January 12, 2015, the President of the United States signed into law the Terrorism Risk Insurance Program Reauthorization Act of 2014,

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which extends TRIA through December 31, 2020. Under TRIA commercial insurers are required to offer insurance coverage against terrorist incidents and are reimbursed by the federal government for paid claims subject to deductible and retention amounts. TRIA, and its related rules, contain certain definitions, requirements and procedures for insurers filing claims with the Treasury for payment of the Federal share of compensation for insured losses under the Terrorism Risk Insurance Program (“TRIP”). TRIP is a temporary federal program that has been extended by TRIA to provide for a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism.  The Treasury implements the program. On June 29, 2004, the Treasury issued a final Claims Procedures Rule, effective July 31, 2004, as part of its implementation of Title I of TRIA.  TRIA also contains specific provisions designed to manage litigation arising out of, or resulting from, a certified act of terrorism, and on July 28, 2004, the Treasury issued a final Litigation Management Rule for TRIA. The Claims Procedures Rule specifically addresses requirements for Federal payment, submission of an initial notice of insured loss, loss certifications, timing and process for payment, associated recordkeeping requirements, as well as the Treasury’s audit and investigation authority.  These procedures will apply to all insurers that wish to receive their payment of the Federal share of compensation for insured losses under TRIA.  
Additional materials addressing TRIA and TRIP, including Treasury issued interpretive letters, are contained on the Treasury’s website.
European Union (EU)
The S II regulatory regime in the EU, imposes solvency and governance requirements across all 28 EU Member States.
S II, imposes economic risk-based solvency requirements across all 28 European Member States and consists of three pillars: (1) Pillar I - quantitative capital requirements, based on a valuation of the entire balance sheet; (2) Pillar II - qualitative regulatory review, which includes governance, internal controls, enterprise risk management and supervisory review process; and (3) Pillar III - market discipline, which is accomplished through reporting of the insurer's financial condition to regulators.
Our Lloyd’s Managing Agency, Argo Managing Agency Limited, which manages Syndicate 1200, Syndicate 1910 and Special Purpose Arrangement 6117 (“SPA 6117”) at Lloyd’s, and ArgoGlobal SE (Malta) are required to comply with S II.  
United Kingdom
Financial Services and Markets Act 2000 (including Amendments) and The Financial Services Act 2012
The Financial Services and Markets Act 2000 (including Amendments) and the Financial Services Act 2012 provide regulators with comprehensive powers to counter future risks to financial stability and to ensure that consumers are treated fairly.
The Bank of England has macro-prudential responsibility for oversight of the financial system and, through the Prudential Regulation Authority (“PRA”), for day-to-day prudential supervision of financial services firms managing significant balance-sheet risk. The Financial Conduct Authority (“FCA”) protects consumers, promotes competition and ensures integrity in markets.
PRA and FCA Regulations
Argo Managing Agency Limited, managing agent of Syndicate 1200, Syndicate 1910 and SPA 6117, is authorized by the PRA and regulated by the PRA and the FCA, as well as being supervised by Lloyd’s.  The PRA, FCA and Lloyd’s have common objectives in ensuring that the Lloyd’s market is appropriately regulated.  To minimize duplication, there are arrangements with Lloyd’s for co-operation on supervision and enforcement.  Both the PRA and FCA have substantial powers of intervention in relation to the Lloyd’s Managing Agents (such as Argo Managing Agency Limited) that they regulate, including the power to remove their authorization to manage Lloyd’s Syndicates.  In addition, each year the PRA requires Lloyd’s to satisfy an annual solvency test that measures whether Lloyd’s has sufficient assets in the aggregate to meet all outstanding liabilities of its members, both current and run-off.  If Lloyd’s fails this test, the PRA may require Lloyd’s to cease trading and/or its members to cease or reduce underwriting.
Lloyd’s Regulations and Requirements
The operations of Syndicate 1200, Syndicate 1910 and SPA 6117 are supervised by Lloyd’s. The Council of Lloyd’s has wide discretionary powers to regulate members’ underwriting at Lloyd’s. The Lloyd’s Franchise Board is responsible for setting risk management and profitability targets for the Lloyd’s market and operates a business planning and monitoring process for all Syndicates, including reviewing and approving the Syndicates’ annual business plans. The Lloyd’s Franchise Board requires annual approval of Syndicate 1200’s, Syndicate 1910’s and SPA 6117’s business plans, including maximum underwriting capacity, and may require changes to any business plan presented to it or that additional capital be provided to support underwriting. Lloyd’s also imposes various charges and assessments on its members.

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The Argo Group predominantly participates in the Lloyd’s Market as a Lloyd’s corporate member on Syndicate 1200 and Syndicate 1910 through Argo (No 604) Ltd. By entering into a membership agreement with Lloyd’s, Argo (No 604) Ltd undertakes to comply with all Lloyd’s by-laws and regulations as well as the provisions of the Lloyd’s Acts and Financial Services and Markets Act 2000 that are applicable to it. The underwriting capacity of a member of Lloyd’s must be supported by providing a deposit (referred to as “Funds at Lloyd’s”) in the form of cash, securities or letters of credit in an amount determined by Lloyd’s. The amount of such deposit is calculated for each member through the completion of an annual capital adequacy exercise. These requirements allow Lloyd’s to evaluate that each member has sufficient assets to meet its underwriting liabilities plus a required solvency margin.
If a member of Lloyd’s is unable to pay its claims to policyholders, such claims may be payable by the Lloyd’s Central Fund. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members. The Council of Lloyd’s has discretion to call or assess up to 3% of a member’s underwriting capacity in any one year as a Central Fund contribution.
Argo Managing Agency Limited owns five service companies, which produce business for Syndicate 1200 under delegated underwriting authority arrangements. They are:
ArgoGlobal Underwriting (Dubai) Limited
ArgoGlobal Underwriting (Dubai) Ltd. is authorized as an “Authorized Firm” licensed to operate through Dubai International Financial Centre (“DIFC”) as an insurance manager and insurance intermediary by the Dubai Financial Services Authority (“DFSA”). Although not subject to solvency requirements and other regulations that apply to insurance carriers and reinsurers generally in Dubai, ArgoGlobal (Dubai) Ltd. is subject to DFSA’s laws and regulations relating to its business activities as an Authorized Firm (Category 4) operating in Dubai. The Company operates from the Lloyd’s Dubai platform, which gives Lloyd’s an underwriting base in the MENA region. ArgoGlobal Underwriting (Dubai) Limited therefore receives regulatory oversight from both Lloyd’s and the DFSA.
ArgoGlobal Underwriting Asia Pacific Pte Limited
ArgoGlobal Underwriting Asia Pacific Pte Limited is authorized by the Monetary Authority of Singapore (MAS) as a Lloyd’s Asia Scheme Service Company. The Company operates from the Lloyd’s Singapore platform, which provides Lloyd’s with an insurance and reinsurance hub in Singapore writing business from across the region. The Company therefore receives regulatory oversight from both Lloyd’s and the MAS.
Argo Direct Limited
Argo Direct Limited (“ADL”) is authorized and regulated by the Financial Conduct Authority. It is an approved Lloyd’s coverholder service company. ADL has been given permission to provide regulated products and services to commercial and retail customers. The Company therefore receives regulatory oversight from both Lloyd’s and the FCA.
ArgoGlobal Insurance Services, Inc.
ArgoGlobal Insurance Services Inc. (AGIS) is an approved Lloyd’s coverholder service company. It is a corporation incorporated in Delaware, USA authorized to transact business in the State of Florida. The Company receives regulatory oversight from Lloyd’s.
ArgoGlobal Services (Hong Kong) Limited
ArgoGlobal Services (Hong Kong) Limited is registered with the Insurance Agents Registration Board (IARB). It is a Lloyd’s approved service company coverholder. ArgoGlobal Services (Hong Kong) Limited is subject to the laws and rules of Hong Kong. The Company is subject to regulatory oversight from Lloyd’s.
Argo Group owns a sixth service company which produces business to Syndicate 1910 and Syndicate 1200 under a delegated underwriting authority arrangement. It is:
Ariel Re Bda Limited (domiciled in Bermuda)
Ariel Re Bda Limited is licensed by the Bermuda Monetary Authority (“BMA”) as an Insurance Agent and an Insurance Manager. It is a Lloyd’s approved service company coverholder. Ariel Re Bda Limited is subject to the laws of Bermuda and the supervision and regulatory requirements of the BMA.

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Dividends
Dividend payments from Argo Managing Agency Limited to its immediate parent are not restricted by regulatory authority.  Dividend payments from Argo Managing Agency Limited are to be made at the discretion of Argo Managing Agency Limited’s Board of Directors and are subject to the earnings, operations, financial condition, capital and general business requirements of Syndicate 1200 and Syndicate 1910. Dividends from a Lloyd’s managing agent and a Lloyd’s corporate member can be declared and paid provided it has sufficient capital available.
Malta
ArgoGlobal SE operates as an authorized insurance undertaking domiciled in Malta under the Malta Business Act (Cap. 403) by the Malta Financial Services Authority (“MFSA”). ArgoGlobal SE is regulated as a domestic insurer by the MFSA and subject generally to Malta’s laws and regulations relating to insurance and solvency requirements. ArgoGlobal SE underwrites risks throughout the European Member States and European Economic Area, on an “Exercise of Passport Rights-Services/Establishment” basis. The authorized branch office in Zurich can only underwrite Swiss domiciled risks. Dividends from ArgoGlobal SE are subject to applicable laws and regulations in Malta.
Italy
ArgoGlobal Assicurazioni S.p.A is an authorized insurance entity domiciled in Italy. It is authorized by the Institute for the Supervision of Insurance (“IVASS”) to operate the business of insurance under ISVAP No. 2581 as of January 21, 2008. ArgoGlobal Assicurazioni S.p.A is enrolled in the Register of Insurance Companies under No. 1.00163. ArgoGlobal Assicurazioni S.p.A receives regulatory oversight from IVASS and the EU. Dividends from ArgoGlobal Assicurazioni S.p.A are subject to applicable laws and regulations in Italy.
General Data Protection Regulations
In the European Union the General Data Protection Regulation (the "GDPR") came into force on May 25, 2018. Argo Group is subject to the requirements of GDPR as regards the provision of our services and products within the European Union.
Argo Group recognizes the importance of maintaining data privacy protections for nonpublic personal information as required by GDPR. Argo Group has established policies and procedures that are in compliance with the applicable GDPR requirements.
Brazil
Argo Seguros is authorized to operate as a licensed insurer domiciled in Brazil by the Superintendệncia de Seguros Privados, (“SUSEP”) per Ordinance nº 4.316 issued in 2011. Argo Seguros is regulated as a domestic insurer by SUSEP and subject to Brazil’s laws and regulations relating to insurance and solvency requirements. Dividends from Argo Seguros are subject to applicable laws and regulations in Brazil.
In April 2014, Argo Re Ltd. was registered by SUSEP as an admitted reinsurer in Brazil, and established its representative office, Argo Re Escritório de Representação no Brasil Ltda. (“Argo Re Escritório”) in São Paulo, Brazil, per Ordinance nº 5.795.  Argo Re Escritorio is focused on serving the domestic commercial reinsurance market.  Argo Re Ltd. and Argo Re Escritório are subject to Brazil’s laws and regulations relating to business activities as an admitted reinsurer.
Reinsurance
As is common practice within the insurance industry, Argo Group’s insurance and reinsurance subsidiaries transfer a portion of the risks insured under their policies by entering into a reinsurance treaty with another insurance or reinsurance company. Purchasing reinsurance protects carriers against the frequency and/or severity of losses incurred on the policies they issue, such as an unusually large individual claim or serious occurrence in which a number of claims on one policy aggregate to produce an extraordinary loss or where a catastrophe generates a large number of claims on multiple policies at the same time.
As a specialty reinsurer, we purchase a broad-based series of reinsurance programs in an effort to mitigate the risk of significant capital deterioration, as well as to minimize the volatility of earnings against the impact of a single, large catastrophe or several smaller, but still significant catastrophe events. These programs are structured with the intention of limiting the financial impact of significant catastrophe losses in a given fiscal year to no more than one quarter’s earnings.
Reinsurance does not discharge the issuing primary carrier from its obligation to pay a policyholder for losses insured under its policy. Rather, the reinsured portion of each loss covered under a reinsurance treaty is ceded to the assuming reinsurer for reimbursement to the

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primary carrier. Because this creates a receivable owed by the reinsurer to the ceding carrier, there is credit exposure to the extent that any reinsurer is unable or unwilling to meet the obligations assumed under its reinsurance treaty. The ability to collect on reinsurance is subject to the solvency of the reinsurers, interpretation of contract language and other factors. We are selective in regard to our reinsurers, seeking out those with stronger financial strength ratings from A.M. Best or S&P. However, the financial condition of a reinsurer may change over time based on market conditions. We perform credit reviews on our reinsurers, focusing on a number of criteria including, but not limited to, financial condition, stability, trends and commitment to the reinsurance business. In certain instances, we also require deposit of assets in trust, letters of credit or other acceptable collateral. This would be to support balances due from reinsurers whose financial strength ratings fall below a certain level or who transact business on a non-admitted basis in the case of the U.S. insurance entities in the state where the reinsured subsidiary is domiciled, or who provide reinsurance only on a collateralized basis.
At December 31, 2018, Argo Group’s reinsurance recoverable balance totaled $2,688.3 million, net of an allowance for doubtful accounts of $1.8 million. The following table reflects the credit ratings for our reinsurance recoverable balance at December 31, 2018:
 
2018
(in millions)
Reinsurance
Recoverables
 
% of Total
Ratings per A.M. Best
 
Reinsurers rated A+ or better
$
1,451.4

 
54.1
%
Reinsurers rated A
605.5

 
22.5
%
Reinsurers rated A-
156.9

 
5.8
%
Reinsurers rated below A- or not rated
474.5

 
17.6
%
 
$
2,688.3

 
100.0
%
Nine of the top ten reinsurers, rated A or higher, accounted for $1,472.1 million, or approximately 55% of the reinsurance recoverable balance as of December 31, 2018. Management has concluded that all balances (net of any allowances for doubtful accounts) are considered recoverable as of December 31, 2018. As of December 31, 2018, we hold collateral for 66% of the amounts recoverable from reinsurers rated below A- or not rated.
Additional information relating to our reinsurance activities is included under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 4, “Reinsurance,” in the Notes to the Consolidated Financial Statements.
Reserves for Losses and Loss Adjustment Expenses
Argo Group records reserves for specific claims incurred and reported, as well as reserves for claims incurred but not reported (“IBNR”). The estimates of losses for reported claims are established judgmentally on an individual case basis. Such estimates are based on our particular experience with the type of risk involved and our knowledge of the circumstances surrounding each individual claim. Reserves for reported claims consider our estimate of the ultimate cost to settle the claims, including investigation and defense of the claim, and may be adjusted for differences between costs originally estimated and costs re-estimated or incurred.
Reserves for IBNR claims are based on the estimated ultimate cost of settling claims, including the effects of inflation and other social and economic factors, using past experience adjusted for current trends and any other factors that would modify past experience. We use a variety of statistical and actuarial techniques to analyze current claims costs, including frequency and severity data and prevailing economic, social and legal factors. Reserves established in prior years are adjusted as loss experience develops and new information becomes available.
The estimate of reinsurance recoverables related to reported and unreported losses and loss adjustment expenses represent the portion of the gross liabilities that are anticipated to be recovered from reinsurers. Amounts recoverable from reinsurers are recognized as assets at the same time as, and in a manner consistent with, the estimate of the gross losses covered by the reinsurance treaty.
We are subject to and establish estimates for claims arising out of catastrophes that may have a significant effect on our business, results of operations and/or financial condition. Catastrophes can be caused by various events, including hurricanes, windstorms, earthquakes, hailstorms, explosions, power outages, severe winter weather, fires and man-made events, such as terrorist attacks.
We have discontinued underwriting certain lines of business; however, we are still obligated to pay losses incurred on these lines. Certain lines currently in run-off are characterized by long elapsed periods between the occurrence of a claim and any ultimate payment to resolve the claim. Included in Run-off Lines segment are claims related to asbestos and environmental liabilities arising out of liability policies primarily written in the 1960s, 1970s and into the early1980s with a limited number of claims occurring on policies written in the early 1990s. Business formerly written in our Risk Management business is also classified in the Run-off Lines segment. Additional discussion

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on the Run-off Lines segment can be found under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Additional information relating to our loss reserve development is included under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 5, “Reserves for Losses and Loss Adjustment Expenses,” in the Notes to Consolidated Financial Statements.
Investments
Investment Strategy and Guidelines
Our investment portfolio is designed to ensure adequate liquidity for the prompt payment of our obligations, including any potential claims payments. To ensure adequate liquidity for payment of claims, we broadly seek to match the profile of our invested assets with those of our liabilities. We consider liquidity, anticipated duration, and the currency of our liabilities when making investment decisions. To meet our liquidity needs, our core bond portfolio consists primarily of investment grade, fixed-maturity securities. As of December 31, 2018, fixed maturities, along with cash and short-term investments, represented 79.0% of our total investments and cash equivalents.
In an effort to meet business needs and mitigate risks, our investment guidelines provide restrictions on our portfolio’s composition, including issuer limits, sector limits, credit quality limits, portfolio duration, limits on the amount of investments in approved countries and permissible security types. Our investment managers may invest some of the investment portfolio in currencies other than the U.S. dollar based on where our business is underwritten, the currency in which our loss reserves are denominated, regulatory requirements, or our managers’ point of view on a given currency.
The performance of our investment portfolio is subject to a variety of risks, including risks related to general economic conditions, market volatility, interest rate fluctuations, currency fluctuations, liquidity risk and credit and default risk. Investment guideline restrictions have been established in an effort to minimize the effect of these risks but may not always be effective due to factors beyond our control. A significant change in interest rates could result in losses, realized or unrealized, in the value of our investment portfolio. Additionally, with respect to some of our investments, we are subject to prepayment and possibly reinvestment risk. Certain investments are subject to restrictions on sale, transfer and redemption, which may limit our ability to withdraw funds or realize gains on such investments for some period of time after our initial investment. The values of, and returns on, such investments may also be more volatile.
Investment Committee and Investment Managers
The Investment Committee of our Board of Directors has approved an investment policy statement that contains investment guidelines and serves to govern our investment activity. The Investment Committee regularly monitors our overall investment results, compliance with investment objectives and guidelines and ultimately reports our overall investment results to the Board of Directors.
We currently use multiple professional investment managers to manage our portfolio. A small portion of the investment portfolio is managed internally.
Additional information relating to our investment portfolio is included under Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” and Note 3, “Investments,” in the Notes to Consolidated Financial Statements.
Employees
As of December 31, 2018, we had 1,411 employees. We provide a comprehensive benefits program for substantially all employees, including a 401(k) savings plan and other retirement plans, health, life and disability benefits and a tuition reimbursement program.
Available Information
Our executive offices are located at 110 Pitts Bay Road, Pembroke HM08, Bermuda. The mailing address is P.O. Box HM 1282, Hamilton HM FX, Bermuda. The telephone number is (441) 296-5858. The website address is www.argolimited.com. None of the information contained on our website is part of this report or is incorporated in this report by reference. We file annual, quarterly and current reports, proxy statements and other information and documents with the Securities and Exchange Commission (“SEC”), which are made available at www.sec.gov. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, interactive data files, current reports on Form 8-K and amendments to those reports filed with or furnished to the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practical after we electronically file them with or furnish them to the SEC. Also available on our website, under the Investor Relations and Governance links, are copies of our Audit Committee Charter, Human Resources Committee Charter, Investment Committee Charter, Nominating Committee Charter, Risk & Capital

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Committee Charter, Corporate Governance Guidelines and Terms of Reference, Financial Conduct Report (FCR) and Code of Conduct and Business Ethics. Our Code of Conduct and Business Ethics applies to all of our board members, officers, third-party providers and employees, including our principal executive officer, principal financial officer and principal accounting officer. All of these documents will be provided without charge upon written request to the Senior Vice President, Investor Relations at our above address.
Item 1A. Risk Factors
An investment in our common shares involves various risks, including those mentioned below and those that are discussed from time to time in our other periodic filings with the SEC. Investors should carefully consider these risks, along with the other information filed in this report, before making an investment decision regarding our common shares. There may be additional risks of which we are currently unaware or consider immaterial. All of these risks could have a material adverse effect on our financial condition, results of operations and/or value of our common shares.
Enterprise Risk Management and Governance Frameworks
Purpose
The objective of our Enterprise Risk Management ("ERM") Framework is to ensure that:
1.
All reasonably foreseeable material risks, including financial and non-financial, on and off-balance sheet and current and contingent exposures are identified;
2.
The potential impact of such material risks, including material risks affecting capital requirements and capital management, short-term and long-term liquidity requirements, policyholder obligations and operational strategies and objectives are assessed; and
3.
Policies and strategies are developed and maintained to effectively manage, mitigate and report material risks.
Our framework for managing enterprise risks is intended to meet standards that are not only consistent with the applicable laws and regulations, but which are commercially reasonable, aligned to international best practices (such as ISO 31000) and prudent taking into consideration the interests of our shareholders, policyholders and other counterparties.
Conducting our insurance and reinsurance business operations and related services in a prudent manner requires us to establish sound governance mechanisms, including a sound risk management and internal controls framework. This framework takes into consideration international best practice on enterprise risk management and internal controls and is overseen by our Board of Directors.
The focus of our risk management framework is on “reasonably foreseeable material risks,” meaning those exposures (financial and non-financial, on and off-balance sheet, current and contingent) that we can identify in advance as having the potential, should they occur, to change the way relevant stakeholders would assess our solvency and/or liquidity position or risk profile. Relevant stakeholders include the Board of Directors, senior management, policyholders, investors and the various types of entities that monitor and regulate our business activities and securities.
Risk Strategy
Our “Risk Strategy” encompasses our Risk Appetite Framework and strategy for addressing and managing material business risks. The Risk Strategy is based on and implemented through the respective policies, targets, guidelines, requirements and budgets approved by our Board Risk & Capital Committee on a periodic basis.
The Risk Appetite Framework brings together the overall approach for articulating and managing risk appetite, risk preferences, risk tolerances and risk limits. It describes how this is organized and what processes and procedures underpin its implementation in practice. The aim to provide clarity over the amount of risk that can be taken ensures accountability for decision-making.
Because we are subject to an increasingly complex environment for regulatory and financial oversight, we consider Enterprise Risk Management and Compliance as key functions from an operational standpoint. However, maintaining a suitable and effective Risk Strategy is also viewed as a strategic imperative since it allows us to remain competitive through a better understanding of our own risks and overall solvency needs, on both a per risk and an aggregated enterprise wide basis.
Framework
Our risk management and internal controls framework is designed to enable us to achieve an accurate and timely understanding of (1) the nature, caliber and sensitivity of the material foreseeable risks to which we are exposed, (2) our ability to mitigate or avoid such risks

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and (3) to the extent that an identified risk falls outside of our Risk Appetite, what course of action is necessary to address such risk consistent with our business plans and risk tolerances.
Key elements of our risk management framework are summarized below:
1.
Our risk management framework consists of three lines of defense and begins at the functional level. Each business function is charged with the task of identifying, assessing, measuring, monitoring, reporting and mitigating risks associated with a department’s respective functions and responsibilities. The Chief Risk Officer, who reports on issues of risk management to the Risk & Capital Committee of the Board and leads the second line of defense, plays a key role in risk management by coordinating, facilitating and overseeing the effectiveness and integrity of our risk management activities. This risk management function is also charged with establishing, maintaining and enhancing the methodology and tools used to identify and evaluate risks and, where risks are outside our risk appetite, ensuring that there is an appropriate response applied by the respective risk owner. The Internal Audit department provides a third line of defense by assessing the effectiveness of our risk management processes, practices and internal controls and providing timely feedback and assurance to the Board on the adherence to our risk management framework. The Head of Internal Audit reports to the Audit Committee of the Board on issues related to the internal control framework.
We have established policies to identify and address existing as well as evolving and emerging risks that have the potential to materially impact the adequacy of our financial resources, volatility of our results, expected shareholder returns or our ability to meet our commercial, legal and regulatory obligations.
2.    Our ERM framework is:
embedded in both the organizational structure and strategic oversight process, supported by appropriate internal control policies and procedures.
Our Board has Corporate Governance Guidelines and Terms of Reference that reflect local and international developments with regard to Risk and Capital Management. The Risk & Capital Committee of the Board is regularly briefed on emerging issues relevant to our international footprint as well as evolving regulatory developments, especially in Bermuda, the United States, United Kingdom and the European Union.
The risk management function has responsibility across all of Argo Group for the implementation of the ERM framework. Central to our approach is our Own Risk & Solvency Assessment (ORSA) process which reports the key threats and opportunities facing the business on a quarterly basis to the Board Risk & Capital Committee, and provides an overall evaluation of the capital and solvency implications as well as periodic reporting of our performance against risk appetite.
Throughout the year, risks related to our business are reviewed and evaluated at all levels. A Strategic Landscape is used to communicate to both the Executive and the Risk & Capital Committee the principle threats and opportunities that could impact the organization’s strategy and how these are being addressed over time. Based on these assessments, appropriate risk management actions have been taken to address and mitigate risks where necessary and to ensure that underwriting and investment activities remain consistent with management’s strategic and business plans, as approved by the Board of Directors.
These risk management activities are subsequently monitored, reviewed and, if required, adjusted during the course of regularly scheduled operational meetings, reserve review meetings and other management meetings during the year to assure proper alignment with approved risk appetite and tolerance levels.
supported by information systems that capture underwriting, claim, investment and other operational data in order to provide relevant, accurate and timely information to the applicable business functions.
We employ various data sources and risk models and continue to evaluate and fortify our processes and protocols to assure the integrity of such tools.
designed to incorporate techniques necessary to identify, measure, respond to, monitor and report, on a continuous basis and on an individual and aggregate level, material foreseeable risks.
The risk management techniques, especially with regard to our internal economic capital model, are subject to ongoing review and challenge through independent model validation reviews led by the risk management function. This enables us to improve our quantitative and qualitative views of risk over time.

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designed to specify objectives, risk appetite and tolerance levels, as well as appropriate delegation of oversight, reporting and operating responsibilities across all functions.
Our Risk Appetite Framework defines our ability to take risk through a series of qualitative risk appetite statements that are communicated across the organization, supported by quantitative risk appetite measures and risk tolerances and limits at the Argo Group level as well as on an operational segment and local entity level. The risk appetite is based on our available capital and liquidity and is reflected in the Board of Directors approved business plans. Risk tolerances define boundaries in terms of volatility and provide a term of reference for our operational segments.
Our risk appetite is reflected in our strategic and business planning. In the event of capacity shortages or conflicts with the stipulated limits profile and internal guidelines, fixed escalation and decision-making processes are designed to ensure that business interests and risk management aspects are being surfaced, vetted and reconciled. We actively use our internal capital model for informed decision making around allocation of capital and resources. If necessary, risks are ceded or hedged by means of reinsurance, derivatives or other forms of risk transfer.
Risk tolerances and limits encompassed in our Risk Appetite Framework include:
Primary enterprise-wide portfolio risk appetite measures which are based on our overall portfolio and designed to protect our capital and liquidity position and limit the likelihood of an economic loss for the year;
Secondary, supplementary limits, which serve to limit losses that can arise out of individual risk categories or accumulations, such as natural catastrophes and terrorism, and to limit market and credit risks that could materially impact our solvency were they to materialize;
Other limits, which are designed to protect and preserve our profit/loss performance, reputation and strategic agility and thus protect our future business potential. These limits include parameters for individual risks that could cause permanent damage to how our customers, clients, shareholders and staff perceive us.
Documented insofar as all significant policies and procedures associated with our risk management framework are in writing and available to the Board of Directors, Senior Management and employees.
Our Corporate Governance, Compliance, Risk Management and Internal Controls Policies are reviewed on at least an annual basis. Recommended Policy revisions are provided to the Board of Directors, its Committees and Senior Management, as required on a timely basis.
We believe that the foregoing ERM framework and oversight activities are structured in a way that enables us to take an active approach to risk management in an ever changing legal, regulatory and business environment.
The ERM framework continues to be developed and enhanced over time in response to market developments, and tested against external Risk Maturity Model standards. Improvements to this Model have been recognized externally in 2018. Argo Group specifically received Risk Maturity Model recognition from RIMS (North American risk management society) for the fourth year in a row in 2018.
In 2018, S&P strengthened its view of ERM at Argo Group, citing the following:
Our ERM is adequate with strong risk controls, reflecting their positive assessment of our risk controls and risk culture.
Recognition of our concerted efforts to:
enhance our ERM framework;
improve our risk control functions, specifically underwriting controls as we've ramped up efforts to improve performance and cycle management;
embed our ERM processes into our strategic planning.
We have placed greater emphasis on data analytics and have increased the use of our economic capital model as an additional tool when making key business decisions.
In addition, Argo Group was awarded the ‘Risk Innovation of the Year’ award for 2018 from InsuranceERM magazine, in recognition of the development and implementation of its Stress & Scenario Testing Framework and its application to key risk mitigation options, such as the strengthening of crisis management plans and corporate insurance and ceded reinsurance purchase decisions.
Argo Group was also awarded the ‘Risk Management Program of the Year’ award 2018 from CIR magazine in recognition of its work in setting scenario-based risk tolerance measures for the Clean Energy business, which provide innovative risk financing solutions for

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the protection of solar panel and fuel cell projects. The analysis focused on developing projections for the potential risk accumulations associated with the future growth of the business portfolio to ensure it remained within underwriting appetite.
Through the efforts of management, our internal risk management function and the Board of Directors, we seek to manage our risk exposures within agreed risk tolerances, while recognizing that taking appropriate risks enables us to exploit opportunities beneficial to the organization and to our shareholders.
Significant Risks
Our risk management framework covers the following categories of material foreseeable risks consistent with the guidance provided for each:
Insurance Underwriting Risks
Insurance Underwriting risks are defined as the risk of loss, or adverse change in the value of insurance liabilities, due to inadequate pricing and/or reserving practices. These risks may be caused by the fluctuations in timing, frequency and severity of insured events and claim settlements in comparison to the expectations at the time of underwriting.
The insurance and reinsurance business is historically cyclical, and we may experience periods with excess underwriting capacity and unfavorable premium rates; conversely, we may have a shortage of underwriting capacity when premium rates are strong, both of which could adversely impact our results.
Historically, insurers and reinsurers have experienced significant fluctuations in operating results due to competition, frequency and severity of catastrophic events, levels of capacity, adverse trends in litigation, regulatory constraints, general economic conditions and other factors. The supply of insurance and reinsurance is related to prevailing prices, the level of insured losses and the level of capital available to the industry that, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance and reinsurance industry. As a result, the insurance and reinsurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity increased premium levels. Demand for reinsurance depends on numerous factors, including the frequency and severity of catastrophic events, levels of capacity, introduction of new capital providers, general economic conditions and underwriting results of primary insurers. The supply of reinsurance is related to prevailing prices, recent loss experience and capital levels. All of these factors fluctuate and may contribute to price declines generally in the reinsurance industry.
We cannot predict with certainty whether market conditions will improve, remain constant or deteriorate. Adverse market conditions may impair our ability to underwrite insurance and reinsurance at rates that we consider appropriate and commensurate relative to the risk assumed. If we cannot underwrite insurance or reinsurance at appropriate rates, our ability to transact business would be materially and adversely affected. Any of these factors could lead to an adverse effect on our business, results of operations and/or financial condition.
We operate in a highly competitive environment and no assurance can be given that we will continue to be able to compete effectively in this environment.
We compete with numerous companies that provide property, casualty and specialty lines of insurance and reinsurance and related services. Some of those companies have a larger capital base and are more highly rated than we are. No assurance can be given that we will be able to continue to compete successfully in the insurance and/or reinsurance market. Increased competition in these markets could result in a change in the supply and/or demand for insurance or reinsurance, affect our ability to price our products at risk-adequate rates and retain existing business or underwrite new business on favorable terms. If this increased competition limits our ability to transact business, our operating results could be adversely affected.
Our insurance and reinsurance subsidiaries have exposure to unpredictable and unexpected changes in the claims environment or catastrophes and terrorist acts that can materially and adversely affect our business, results of operations and/or financial condition.
Emerging Claims
Changes in industry practices and legal, judicial, social, technological and other environmental conditions may have an unforeseeable adverse impact on claims and coverage issues. These issues may adversely affect our business, such as by extending coverage beyond the intended scope at the time of underwriting business or increasing the number or size of expected claims. In some instances, these changes may not become apparent until sometime after insurance or reinsurance contracts that are affected were issued and hence cannot be appropriately factored into the underwriting decision. As a result, the full extent of liability under such insurance or reinsurance contracts may not be known for many years after these contracts have been issued, and our financial position and results of operations

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may be materially and adversely affected in such future periods. We maintain an emerging risk identification, analysis and reporting process, overseen by our Emerging Risk Review Group, as part of our Enterprise Risk management framework, which seeks to provide an early identification of such trends. The effects of these and other unforeseen evolving or emerging claims and coverage issues are inherently difficult to predict.
Catastrophic Losses
We are subject to claims arising out of catastrophes that may have a significant effect on our business, results of operations and/or financial condition. Catastrophes can be caused by various events, including tornadoes, hurricanes, windstorms, tsunamis, earthquakes, hailstorms, explosions, power outages, severe winter weather, wildfires and man-made events. The incidence and severity of such randomly occurring catastrophic events are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured values in the area affected by the event and severity of the event. Insurance companies are generally not permitted to reserve for probable catastrophic events until they occur. Therefore, although we will actively manage our risk exposure to catastrophes through underwriting limits and processes and further mitigate it through the purchase of reinsurance protection and other hedging instruments, an especially severe catastrophe or series of catastrophes could exceed our reinsurance or hedging protection and may have a material adverse impact on our business, results of operations and/or financial condition. Also, it is possible that a series of catastrophic events could occur with unusual frequency in a given period which, although individually not severe enough to trigger the reinsurance protection or other hedging instrument, in the aggregate could have a material adverse impact on us.
Further, as a provider of property catastrophe reinsurance coverage in the worldwide marketplace, Syndicate 1910 and Argo Re’s operating results in any given period will depend to some extent on the number and magnitude of such natural and man-made catastrophes. While both Syndicate 1910 and Argo Re may, depending on market conditions, purchase catastrophe retrocessional coverage for their own protection, the occurrence of one or more major catastrophes in any given period could nevertheless have a material adverse impact on Syndicate 1910 and Argo Re’s operating results and/or financial condition. This could, in turn, result in a material adverse impact on Argo Group’s business, results of operations and/or financial condition.
Terrorism
We are exposed to the risk of losses resulting from acts of terrorism. Even if reinsurers are able to exclude coverage for terrorist acts or price that coverage at rates that we consider attractive, direct insurers, like our primary insurance company subsidiaries, might not be able to likewise exclude coverage of terrorist acts because of regulatory constraints. If this occurs, we, in our capacity as a primary insurer, would have a significant gap in our own reinsurance protection and would be exposed to potential losses as a result of any terrorist act. It is impossible to predict the occurrence of such events with statistical certainty and difficult to estimate the amount of loss per occurrence they will generate. If there is a future terrorist attack, the possibility exists that losses resulting from such event could prove to be material to our financial condition and results of operations. Terrorist acts may also cause multiple claims, and there is no assurance that our attempts to limit our liability through contractual policy provisions will be effective.
We deem terrorism peril to include the damage resulting from various terrorist attacks through either conventional weapons or weapons of mass destruction such as nuclear or radioactive explosive devices as well as chemical and biological contaminants. We continue to review our underwriting data in assessing aggregate exposure to this peril. We underwrite against the risk of terrorism with a philosophy of avoidance wherever possible to the extent permitted by applicable law. For both property and casualty exposures, this is accomplished through the use of portfolio tracking tools that identify high risk areas, as well as areas of potential concentration. We estimate the probable maximum loss from each risk as well as for the portfolio in total and factor this analysis into the underwriting and reinsurance buying process. The probable maximum loss is model generated, and subject to assumptions that may not be reflective of ultimate losses incurred for a terrorist act.
Additionally, we have identified certain high-risk locations and hazardous operations where there is a potential for an explosion or a rapid spread of fire due to a terrorist act. Through modeling, we continue to refine our estimates of the probable maximum loss from such an event and factor this analysis into the underwriting evaluation process and also seek to mitigate this exposure through various policy terms and conditions (where allowed by statute) and through the use of reinsurance, to the extent possible. Our current reinsurance arrangements either exclude terrorism coverage or significantly limit the level of coverage that is provided.
Terrorism exclusions are not permitted in the United States for worker’s compensation policies under United States federal law or under the laws of any state or jurisdiction in which we operate. When underwriting existing and new workers compensation business, we consider the added potential risk of loss due to terrorist activity, including foreign and domestic, and this may lead us to decline to underwrite or to renew certain business. However, even in lines where terrorism exclusions are permitted, our clients may object to a terrorism exclusion in connection with business that we may still desire to underwrite without an exclusion, some or many of our insurance policies may not include a terrorism exclusion. Given the reinsurance retention limits imposed under the Terrorism Risk Insurance Act

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of 2002 and its subsequent legislative extensions, and that some or many of our policies may not include a terrorism exclusion, future foreign or domestic terrorist attacks may result in losses that have a material adverse effect on our business, results of operations and/or financial condition.
On November 26, 2002, the President of the United States signed into law the Terrorism Risk Insurance Act of 2002 (“TRIA”). On January 12, 2015, the President of the United States signed into law the Terrorism Risk Insurance Program Reauthorization Act of 2014, which extends TRIA through December 31, 2020. Under TRIA commercial insurers are required to offer insurance coverage against terrorist incidents and are reimbursed by the federal government for paid claims subject to deductible and retention amounts. TRIA, and its related rules, contain certain definitions, requirements and procedures for insurers filing claims with the Treasury for payment of the Federal share of compensation for insured losses under the Terrorism Risk Insurance Program (“TRIP”). TRIP is a temporary federal program that has been extended by TRIA to provide for a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism. The Treasury implements the program. On June 29, 2004, the Treasury issued a final Claims Procedures Rule, effective July 31, 2004, as part of its implementation of Title I of TRIA. TRIA also contains specific provisions designed to manage litigation arising out of, or resulting from, a certified act of terrorism, and on July 28, 2004, the Treasury issued a final Litigation Management Rule for TRIA. The Claims Procedures Rule specifically addresses requirements for Federal payment, submission of an initial notice of insured loss, loss certifications, timing and process for payment, associated recordkeeping requirements, as well as the Treasury’s audit and investigation authority. These procedures will apply to all insurers that wish to receive their payment of the Federal share of compensation for insured losses under TRIA. Failure of these programs could have adverse consequences on our business, results of operations and/or financial condition.
Additional materials addressing TRIA and TRIP, including Treasury issued interpretive letters, are contained on the Treasury’s website.
Global climate change may have an adverse effect on our financial results.
Although uncertainty remains as to the nature and effect of future efforts to curb greenhouse gas (“GHG”) emissions and thereby the mitigation of long-term GHG effects on climate, a broad spectrum of scientific evidence could suggest that man-made production of GHG is a contributing factor to an increased frequency and severity of extreme weather events. Many sectors, to which we provide insurance coverage, might be affected by climate change. Some examples are coastal management, infrastructure, buildings, water, food and energy supply, land-planning, health and rescue preparedness.

We have considered the effect of climate change on historical U.S. hurricane landfall rates by region and category. Studies have examined trends in the historical record, climate model runs, and physical dynamics to conclude that it is likely that the total Atlantic basin hurricane event frequency decreases with increasing global temperature, but that the frequency of the strongest events increases. Hence, there is a possibility that Cat 1-2 hurricanes are over-represented in the historical landfall record, and Cat 3-5 hurricanes are under-represented. However, as climate change is also integral to climate variability and model calibration frequency adjustments, we recognize there remains considerable uncertainty and we are unable to explicitly isolate the effect of climate change in order to quantify its effect on losses.

There is uncertainty assessing the risk of loss and damage associated with the adverse effects of climate change, and the range of approaches to address such loss and damage, including impacts related to extreme weather events and slow onset events, which might adversely impact our business, results of operations and/or financial condition. This uncertainty could give rise to new environmental liability and other types of claims in the energy, manufacturing and other industries we support.
Because our business is dependent upon insurance and reinsurance agents and brokers, we are exposed to certain risks arising out of distribution channels that could cause our results to be adversely affected.
We market and distribute some of our insurance products and services through a select group of wholesale agents who have limited quoting and binding authority and who, in turn, sell our insurance products to insureds through retail insurance brokers. These agencies can bind certain risks that meet our pre-established guidelines. If these agents fail to comply with our underwriting guidelines and the terms of their appointment, we could be bound on a particular risk or number of risks that were not anticipated, when we developed the insurance products. Such actions could adversely affect our results of operations. Additionally, in any given period, we may derive a significant portion of our business from a limited number of agents and brokers and the loss of any of these relationships, or significant changes in distribution channels resulting in loss of access to market through those agents and brokers, could have a significant impact on our ability to market our products and services.
In accordance with industry practice, we may pay amounts owed on claims under our insurance and reinsurance contracts to brokers and/or third-party administrators who in turn remit these amounts to our insureds or reinsureds. Although the law is unsettled and depends upon the facts and circumstances of each particular case, in some jurisdictions in which we conduct business, if an agent or broker fails to remit funds delivered for the payment of claims, we may remain liable to our insured or reinsured ceding insurer for the deficiency.

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Likewise, in certain jurisdictions, when the insured or reinsured pays the remitting funds to our agent or broker in full, our premiums are considered to have been paid in full, notwithstanding that we may or may not have actually received the premiums from the agent or broker. Consequently, we assume a degree of credit risk associated with certain agents and brokers with whom we transact business.
We may incur income statement charges if the reserves for losses and loss adjustment expenses are insufficient. Such income statement charges could be material, individually or in the aggregate, to our financial condition and operating results in future periods.
General Loss Reserves
We maintain reserves for losses and loss adjustment expenses to cover estimated ultimate unpaid liabilities with respect to reported and unreported claims incurred as of the end of each balance sheet date. Reserves do not represent an exact calculation of liability, but instead represent management’s best estimates, which take into account various statistical and actuarial projection techniques as well as other influencing factors. These reserve estimates represent management’s expectations of what the ultimate settlement and administration of claims will cost based on an assessment of known facts and circumstances, review of historical settlement patterns, estimates of trends in claims severity and frequency, changing legal theories of liability and other factors. Variables in the reserve estimation process can be affected by both internal and external events, such as changes in claims handling procedures, economic inflation, legal precedent and legislative changes. Many of these items are not directly quantifiable, particularly on a prospective basis. Additionally, there may be significant reporting lags between the occurrence of an insured event and the time it is actually reported to the insurer. Reserve estimates are continually reevaluated in a regular ongoing process as historical loss experience develops and additional claims are reported and settled, and consequently, management’s estimates may change from time to time. Because the calculation and setting of the reserves for losses and loss adjustment expenses is an inherently uncertain process dependent on estimates, our existing reserves may be insufficient or redundant and estimates of ultimate losses and loss adjustment expenses may increase or decrease over time.
Asbestos and Environmental Liability Loss Reserves
We have received asbestos and environmental liability claims arising out of liability coverage primarily written in the 1960s, 1970s and into the mid-1980s. Beginning in 1986, nearly all standard liability policies contained an express exclusion for asbestos and environmental related claims. All standard policies currently being issued by our U.S. Subsidiaries contain this exclusion. Certain of our specialty units offer coverage for environmental damages on a restrictive, contained basis with fixed limit caps within. In addition to the previously described general uncertainties encountered in estimating reserves, there are significant additional uncertainties in estimating the amount of our potential losses from asbestos and environmental claims. Reserves for asbestos and environmental claims often 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;
difficulty in properly allocating responsibility and/or liability for environmental or asbestos 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.
Management believes these factors continue to render traditional actuarial methods less effective at estimating reserves for asbestos and environmental losses than reserves on other types of losses. We establish reserves to the extent that, in the judgment of our management, the facts and prevailing law reflect an exposure for us not dissimilar to those results the industry has experienced with regard to asbestos and environmental related claims. We have annually reviewed our loss and loss adjustment expense reserves for our run-off lines of business, including asbestos and environmental claims. The review entails a detailed analysis of our direct and assumed exposure. We will continue to monitor industry trends and our own experience in order to determine the adequacy of our environmental and asbestos reserves. There is no assurance that future adverse development will not occur, and such development may have an adverse effect on our results of operations.

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Black Lung Disease Loss Reserves
Through workers compensation coverage provided to coal mining operations by our subsidiary Rockwood, we have exposure to claims for black lung disease. Those diagnosed with black lung disease are eligible to receive workers compensation benefits from various U.S. federal and state programs. These programs are continually being reviewed by the governing bodies and may be revised without notice in such a way as to increase our level of exposure.
Because of all of the above, estimates of ultimate losses and loss adjustment expenses may increase in the future. Income statement charges that would result from such increases, if any, cannot now be reasonably estimated. Such charges could be material, individually or in the aggregate, to our future operating results and financial condition.
Additional information relating to our reserves for losses and loss adjustment expense is included under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 5, “Reserves for Losses and Loss Adjustment Expenses,” in the Notes to Consolidated Financial Statements.
Operational Risk
Operational risk refers to the risk of loss arising from inadequate or failed internal processes, people, systems or the operational impact of external events. This risk encompasses all exposures faced by functions and services rendered in the course of conducting business including, but not limited to, underwriting, accounting and financial reporting, business continuity, claims management, information technology and data processing, legal and regulatory compliance, outsourcing and reinsurance purchasing.
We may be unable to attract and retain qualified employees and key executives.
We depend on our ability to attract and retain experienced underwriting talent and other skilled employees and seasoned key executives who are knowledgeable about our business. The pool of highly skilled employees available to fill our key positions may fluctuate based on market dynamics specific to our industry and independent of overall economic conditions. As such, higher demand for employees having desired talents within a particular geographic region or business segment in which we operate could lead to increased compensation expectations for existing and prospective personnel, making it difficult for us to recruit and retain key employees and/or maintain labor costs at desired levels. If we are unable to attract and retain such talented management, we may be unable to maintain our current competitive position in the specialized markets in which we operate and be unable to expand our operations into new markets, which could adversely affect our results.
Argo Group and its subsidiaries have operations that require highly skilled personnel to work in Bermuda. Given that the pool of applicants available to fill certain highly skilled key positions is limited, we are often required to recruit and retain qualified non-Bermudians to work in Bermuda. Our ability to do so is constrained by Bermuda law, which provides that non-Bermudians are not permitted to engage in any occupation in Bermuda without an approved work permit from the Bermuda Department of Immigration. The Bermuda Department of Immigration will issue a work permit after proper public advertisements have been published and no Bermudian, spouse of a Bermudian or holder of a permanent resident certificate is available who meets the required education, skills and experience for the advertised position. A significant number of our Bermuda based employees are employed pursuant to these work permits granted by The Bermuda Department of Immigration. Many of these individuals are considered to be key employees. If the Bermuda Department of Immigration changes its policies with regard to work permits, and as a result these key employees are required to leave Bermuda, our operations could be disrupted and our financial performance could be adversely affected.
Offices in foreign jurisdictions, such as Dubai, Singapore, Bermuda, United Kingdom, Malta, Switzerland, Italy and Brazil, may have residency and other mandatory requirements that affect the composition of its local boards of directors, executive teams and choice of third-party service providers. Due to the competition for available talent in such jurisdictions, we may not be able to attract and retain personnel as required by our business plans, which could disrupt operations and adversely affect our financial performance.
Our internal controls may fail and have an adverse effect on our business.
We use a number of strategies and processes to mitigate our insurance risk exposure including:
engaging in disciplined and rigorous underwriting within clearly defined risk parameters and subject to various levels of oversight by experienced underwriting professionals;
undertaking technical analysis to inform pricing decisions
carefully evaluating terms and conditions of our policies;
focusing on our risk aggregations by geographic zones, industry type, credit exposure and other bases; and
ceding insurance risk to reinsurance companies.

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However, there are inherent limitations to the effectiveness of these strategies and processes. No assurance can be given that a failure to maintain or follow such processes or controls, an unanticipated event or series of such events will not result in loss levels that could have a material adverse effect on our financial condition or results of operations.
Our strategies and processes to mitigate insurance risk may fail and have an adverse effect on our business.
We continually enhance our operating procedures and internal controls to effectively support our business and comply with our regulatory and financial reporting requirements. As a result of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control objectives have been or will be met, and that instances of fraud, if any, within the Company have been detected. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons or by collusion of two or more persons. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in a cost-effective control system, misstatement due to error or fraud may occur and not be detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our management does not expect that our disclosure controls or our internal controls will prevent all errors or fraud.
We have a risk because of our dependency on our information technology systems which could fail or suffer a security breach, which could adversely affect our business, reputation, results of operations or financial condition or result in the loss of sensitive information.

Like many organizations, our business is highly dependent upon the successful and uninterrupted functioning of our computer and data processing systems. Incidents of publicly reported cyber security incidents have increased recently and the insurance sector as a whole is more exposed than in the past.
 
We retain highly trained staff committed to the development and maintenance of these systems. We maintain and regularly review recovery plans which are intended to enable us to restore critical systems with minimal disruption. We operate a Global Information Security Council to oversee and steer risk management plans to manage these exposures on an ongoing basis. The purpose of the Council is to ensure that security controls and initiatives are balanced between business and technology risks and to ensure regular communication and visibility of our security framework.

While we have not experienced a material cybersecurity breach to date, we have no assurance that a breach associated with hacking, computer viruses, data breaches or Ransomware attacks will not occur in the future. Over time, and particularly recently, the sophistication of these threats continues to increase. We rely on computer systems, some of which may be exposed to a potential cybersecurity breach to perform accounting, policy administration, actuarial and other modeling functions necessary for underwriting business, as well as to process and issue claims and other payments.

There is no assurance that our security measures, including information security policies, will provide fully effective protection from such events. A security breach of our computer systems could disrupt business operations, result in a loss of confidential information, damage our reputation or result in financial liability. Cybersecurity threats extend from individual attempts to gain unauthorized access to our information technology systems to coordinated, elaborate and targeted activity.

We recognize the potential for new cybersecurity risks arising alongside the benefits we derive from technological and digital development and while we employ technological security measures to prevent, detect and mitigate such threats (including independent and in-house vulnerability assessments, access controls, data encryption, continuous monitoring of our information technology networks and systems, maintenance of backup and protective systems) the infrastructure may be vulnerable to security incidents which could result in the disruption of business operations and the corruption, unavailability, misappropriation or destruction of critical data and confidential information (both our own and that of third parties). Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.

We are subject to a number of data privacy laws and regulations enacted in the jurisdictions in which we do business. A misuse or mishandling of personal information being sent to or received from a client, employee or third party could damage our businesses or our reputation or result in significant monetary damages, regulatory enforcement actions, fines and criminal prosecution in one or more jurisdictions. We routinely transmit, receive and store certain types of personal information by email and other electronic means. Although

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we attempt to protect this personal information, we may be unable to do so in all cases, especially with customers, business partners and other third parties who may not have or use appropriate controls to protect personal information. Any failure to protect the privacy of personal information could adversely affect our reputation and have a material adverse effect on our financial condition and results of operations.

The NYDFS issued Cybersecurity Requirements for Financial Services Companies that require certain of our insurance operations to, among other things, establish and maintain a cybersecurity policy, a cybersecurity breach incident response process and to designate a Chief Information Security Officer. The regulation first came into effect in 2017 with a two -year transition period. In addition, the NAIC adopted the Insurance Data Security Model Law in October 2017. The purpose of this Model Law is to establish standards for data security and for the investigation and notification of insurance commissioners of cybersecurity events involving unauthorized access to, or the misuse of, certain non-public personal information.

In the European Union, the GDPR became effective on May 25, 2018.We are subject to the GDPR requirements as regards the provision of our services and products within the European Union. Significant penalties for GDPR non-compliance have been established which could result, in a worst case, in a fine of up to 4% of a firm’s global annual revenue. Those monetary penalties, regulatory or legal actions or the damage to our businesses or reputation, could have a material adverse effect on our results of operations and financial condition. Third parties to whom we outsource certain functions are also subject to GDPR compliance requirements, and their failure to adhere to these regulations also could damage our businesses or reputation, and/or could have a material adverse effect on our results of operations and financial condition

The implementation of these various regulations has imposed additional compliance obligations and have required a review of our relevant policies and procedures.

The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties, and remediation costs, which in turn could have a material impact on our results of operation or financial condition. While we maintain cyber liability insurance providing first party and third party protection, such insurance may not provide insurance coverage for all of the costs and damages associated with the consequences of personal information being compromised. In some cases, such unauthorized access may not be immediately detected. This may impede or interrupt our business operations and could adversely affect our consolidated financial condition or results of operations. We have expanded our cyber liability insurance coverage in an attempt to effectively manage our post-event financial consequences. We recognize that even if we successfully protect our infrastructure and personal information, we could suffer harm to our reputation, if attempted security breaches were to be publicized.

We also provide comprehensive employee engagement and training programs in order to guard against the potential occurrence of malicious attempts to extort sensitive information from our systems by targeting our staff using social engineering techniques (also known as "phishing"). We continue to conduct our own "phishing" testing to periodically test our own preparedness and use the results of such testing to appropriately focus our staff engagement communication. Such training and testing may not prove effective.
We may experience issues with outsourcing relationships which might impact our ability to conduct business in a prudent manner and could negatively impact our operations, results and financial condition.
We continue to outsource a number of technology and business process functions to third-party providers. We may continue to do so in the future as we review the effectiveness of our organization. If we do not effectively select, develop, implement and monitor our outsourcing relationships, or if we experience technological or other issues with transition, or if third-party providers do not perform as anticipated we may not realize productivity improvements or cost efficiencies and may experience operational difficulties, increased costs and a loss of business that may have an adverse effect upon on our operations or financial condition.
We periodically negotiate provisions and renewals of these relationships, and there can be no assurance that such terms will remain acceptable to us or such third parties. If such third-party providers experience disruptions or do not perform as anticipated, or we experience problems with a transition to a third-party provider, we may experience operational difficulties, an inability to meet obligations (including, but not limited to, policyholder obligations), a loss of business and increased costs, or suffer other negative consequences, all of which may have a material adverse effect on our business and results of operations.
Our outsourcing of certain technology and business process functions to third parties may expose us to enhanced risk related to data security, which could result in adverse monetary, reputational and/or regulatory consequences, which in turn could have an adverse effect on our operations or financial condition. If we do not effectively monitor these relationships, third party providers do not perform as anticipated, technological or other problems occur with an outsourcing relationship we may not realize expected productivity improvements or cost efficiencies and may experience operational difficulties.

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In addition, our ability to receive services from third-party providers based in different countries might be impacted by political instability, unanticipated regulatory requirements or policies in our main operating jurisdictions. As a result, our ability to conduct our business might be adversely affected.
Market, Credit, Investment and Liquidity Risk
Market Risk is the risk of loss or adverse change in the financial position due to fluctuations in the level and volatility of market prices of assets, liabilities and financial instruments. This risk may be caused by fluctuations in interest rates, foreign exchange rates or equity, property and securities values.
Credit Risk is the risk of loss or adverse change in the financial position due to fluctuations in the credit standing of issuers of securities, counterparties or any other debtors, including risk of loss arising from an insurer’s inability to collect funds from debtors.
Investment Risk is the uncertainty associated with making an investment that may not yield the expected returns or performance, including the risk that an investment will decline in value, result in a loss or result in liability or other adverse consequences for the investor.
Liquidity Risk is the risk of loss or our inability to realize investments and other assets in order to meet our financial obligations when they fall due or the inability to meet such obligations except at excessive cost.
In an effort to meet business needs and mitigate risks, our investment guidelines provide restrictions on our portfolio’s composition, including issuer limits, sector limits, credit quality limits, portfolio duration, country of issuance and permissible security types. Our investment managers may invest some of the investment portfolio in currencies other than the U.S. dollar. As such, there can be no assurance that changes in currency values will not have an adverse impact on our results of operations or financial position.
The performance of our investment portfolio is subject to a variety of risks, including risks related to general economic conditions, market volatility, interest rate fluctuations, liquidity risk and credit and default risk. Investment guideline restrictions have been established in an effort to minimize the effect of these risks but may not always be effective due to factors beyond our control. A significant change in interest rates could result in losses, realized or unrealized, in the value of our investment portfolio. Additionally, with respect to some of our investments, we are subject to prepayment and possibly reinvestment risk. Certain investments outside our highly rated fixed income portfolio, which includes high yield fixed maturity securities, equities and other alternative investments are subject to restrictions on sale, transfer and redemption, which may limit our ability to withdraw funds or realize gains on such investments for some period of time after our initial investment. The values of, and returns on, such investments may also be more volatile.
A prolonged recession or a period of significant turmoil in the U.S. and international financial markets, could adversely affect our business, liquidity and financial condition and our share price.
U.S. and international financial market disruptions such as the ones experienced in the last global financial crisis, along with the possibility of a prolonged recession, may potentially affect various aspects of our business, including the demand for and claims made under our products, our counterparty credit risk and the ability of our customers, counterparties and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital resources and our investment performance. Volatility in the U.S. and other securities markets may also adversely affect our share price. Depending on future market conditions, we could incur substantial realized and unrealized losses in future periods, which may have an adverse impact on our results of operations, financial condition, debt and financial strength ratings, insurance subsidiaries’ capital levels and our ability to access capital markets.
Our investment portfolio is subject to significant market and credit risks which could result in an adverse impact on our financial position or results.
We hold a diversified portfolio of investments. These investments are managed in accordance with our investment policy by professional investment management firms and internally, under the direction of our Investment Committee, Chief Executive Officer, Chief Financial Officer and Chief Investment Officer. Although our investment policies stress diversification of risks, conservation of principal and liquidity, our investments are subject to general economic conditions and market risks as well as risks inherent to particular securities.
During an economic downturn, our investment portfolio could be subject to higher risk. The value of our investment portfolio is subject to the risk that certain investments may default or become impaired due to deterioration in the financial condition of one or more issuers of the securities held or due to deterioration in the financial condition of an insurer that guarantees an issuer’s payments of such investments. Such defaults and impairments could reduce our net investment income and result in realized investment losses.

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As of December 31, 2018, we hold $292.0 million of investments in the energy and mining sector, which represents 6.1% of our total investment portfolio. Fluctuations in oil prices have disrupted the market values for this sector, particularly for oil exploration, production and servicing companies. Additionally, environmental concerns have had an impact on the business prospects of the mining sector. We recognize through our membership in ‘ClimateWise’ the exposure of investments to transition risks associated with ‘de-carbonization’ and have undertaken stress and scenario testing exercises to understand the implications of such risks on our asset portfolio. We understand the increasing influence of investors through measures such as ESG indices and other stakeholders, through initiatives such as the TFFD. We continue to closely monitor and evaluate these developing trends. Continued disruption and uncertainty in these sectors could have an adverse impact on our results of operations and financial position.
Our investment portfolio is also subject to increased valuation uncertainties when investment markets are illiquid. The valuation of investments is more subjective when markets are illiquid, thereby increasing the risk that the portion of the investment portfolio that is carried at fair value as reflected in our consolidated financial statements is not reflective of prices at which actual transactions would occur for certain investments.
Additionally, our portfolio of investments in fixed maturity and short-term securities may be adversely affected by changes in inflation and/or interest rates which, in turn, may adversely affect operating results. The fair value and investment income of these assets fluctuate with general economic and market conditions. Generally the fair value of fixed maturity securities decreases as interest rates increase. Some fixed maturity securities have call or prepayment options, which represent possible reinvestment risk in declining rate environments. Other fixed maturity securities such as mortgage-backed and asset-backed securities carry prepayment risk.
We also invest in marketable equity securities. These securities are carried on our balance sheet at fair value and are subject to potential losses and declines in market value. Our invested assets also include investments in limited partnerships, privately held securities and other alternative investments. Such investments entail substantial risks.
Risks for all types of securities are managed through application of the investment policy, which establishes investment parameters that include, but are not limited to, maximum percentages of investment in certain types of securities, minimum levels of credit quality and option-adjusted duration guidelines. There is no guarantee of policy effectiveness.
There can be no assurance that our investment objectives will be achieved, and results may vary substantially over time. In addition, although we seek investment strategies that are correlated with our insurance and reinsurance exposures, losses in our investment portfolio may occur at the same time as underwriting losses and, therefore, exacerbate such losses’ adverse effect on us.
We may be adversely affected by foreign currency fluctuations.
Although our foreign subsidiaries’ functional currency is the U.S. Dollar, with the exception of our Brazilian subsidiary whose functional currency is the Brazilian Real and our Malta subsidiary whose functional currency is the Euro, certain premium receivables and loss reserves include business denominated in currencies other than U.S. Dollars. We are exposed to the possibility of significant claims in currencies other than U.S. Dollars. We may, from time to time, experience losses in the form of increased claims costs or devaluation of assets available for paying claims resulting from fluctuations in these non-U.S. currencies, which could materially and adversely affect our operating results.
We may be adversely affected by changes in economic and political conditions, including inflation and changes in interest rates.
The effects of inflation could cause the cost of claims to rise in the future. Our reserve for losses and LAE includes assumptions about future payments for settlement of claims and claims handling expenses, such as medical treatments and litigation costs. To the extent inflation causes these costs to increase above reserves established for these claims, we will be required to increase our loss reserves with a corresponding reduction in our net income in the period in which the deficiency is identified. Furthermore, if we experience deflation or a lack of inflation going forward and interest rates remain very low or continue to decline, we could experience low portfolio returns because we hold fixed income investments of fairly short duration.
Additionally, our operating results are affected, in part, by the performance of our investment portfolio. Our investment portfolio may be adversely affected by inflation or changes in interest rates. Such adverse effects include the potential for realized and unrealized losses in a rising interest rate environment or the loss of income in an environment of prolonged low interest rates. Such effects may be further impacted by decisions made regarding such things as portfolio composition and duration given the prevailing market environment. Interest rates are affected by many factors, including the fiscal and monetary policies of the U.S. and other major economies, inflation, economic and political conditions and other factors beyond our control. Although we attempt to take measures to manage the risks of investing in changing interest rate environments, we may not be able to mitigate interest rate sensitivity effectively. Despite our mitigation efforts, which include duration targets for asset portfolios, compliance monitoring of these targets and means to reasonably and effectively match

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asset duration to the duration of our liabilities, fluctuation in interest rates could have a material adverse effect on our business, results of operations and/or financial condition.
We face a risk of non-availability/non-collectability of reinsurance, which could materially and adversely affect our business, results of operations and/or financial condition.
As is common practice within the insurance industry, we transfer a portion of the risks insured under our policies to other companies through the purchase of reinsurance or other, similar risk mitigating hedging instruments. This reinsurance is maintained to protect the insurance and reinsurance subsidiaries against the severity of losses on individual claims, unusually serious occurrences in which a number of claims produce an aggregate extraordinary loss and catastrophic events. Although reinsurance does not discharge our subsidiaries from their primary obligation to pay for losses insured under the policies they issue, reinsurance does make the assuming reinsurer liable to the insurance and reinsurance subsidiaries for the reinsured portion of the risk. A credit exposure exists with respect to ceded losses to the extent that any reinsurer is unable or unwilling to meet the obligations assumed under the reinsurance contracts. The collectability of reinsurance is subject to the solvency of the reinsurers, interpretation and application of contract language and other factors. We are selective in regard to our reinsurers, placing reinsurance with those reinsurers with stronger financial strength ratings from A.M. Best, S&P or a combination thereof. Despite strong ratings, the financial condition of a reinsurer may change based on market conditions. In certain instances we also require assets in trust, letters of credit or other acceptable collateral to support balances due, however, there is no certainty that we can collect on these collateral agreements in the event of a reinsurer's default. It is not always standard business practice to require security for balances due; therefore, certain balances are not collateralized. A reinsurer’s insolvency or inability to make payments under the terms of a reinsurance contract could have a material adverse effect on our business, results of operations and/or financial condition.
Concentration Risk
Concentration Risk is the risk of exposure to losses associated with inadequate diversification of portfolios of assets or obligations. Concentration risk can arise in both the asset and liability side of the balance sheet as well as in off-balance sheet items and can originate from a series of sources such as natural or man-made catastrophes or unprecedented economic events, individual risk exposure, or a combination of risk exposures such as credit, investment, underwriting and liquidity.
We offer a variety of insurance products across different operational segments and geographic regions. As such, diversification is a key component to our business model. Risk diversification helps us manage our capital allocation by limiting the impact of any single event to our economic, financial and regulatory condition. The degree to which the diversification effect can be realized depends not only on the correlation between risks but also on the level of relative concentration of those risks. Based on these assumptions, our goal is to maintain an appropriately balanced risk profile by avoiding any disproportionately large risks. At the Argo Group level, we identify, measure, manage and monitor pre-defined concentration risk scenarios across the operational segments, including our own outward reinsurance placements. With respect to investments, top-down indicators such as strategic asset allocation thresholds are defined and closely monitored to ensure balanced investment portfolios. Disproportionately large risks that might accumulate and have the potential to produce substantial losses, such as, major natural catastrophic or credit events, are modeled, budgeted and monitored on a standalone basis.
Despite the introduction of identification, modeling and monitoring protocols and in light of the inherent limitations to the tools and applications used, it is possible that an unknown, undetected or underestimated accumulation event could occur and result in a material financial loss.
For more details, see also above Insurance and Market/Credit Risk sections.
Strategic Risk
Strategic Risk means the risk of our inability to implement appropriate business plans and strategies, make decisions, allocate resources or adapt to changes in the business environment. Strategic Risk includes the risk of the current or prospective adverse impact on earnings or capital arising from business decisions, improper execution of decisions or lack of responsiveness to industry changes.
Deterioration of the macroeconomic environment in the U.S., Eurozone and worldwide
Economic imbalances and financial market turmoil could result in a widening of credit spreads and volatility in share prices. Certain financial and economic data may deteriorate. These circumstances could lead to a decline in asset value and potentially reduce the demand for insurance due to limited economic growth prospects. The ultimate impact of such conditions on the insurance industry in general, and on our operations in particular, cannot be fully or accurately quantified at this time.

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Adverse developments in the broader economy could create significant challenges to the insurance industry. If policy responses in Europe, the U.S. and internationally are not effective in mitigating these conditions, the insurance sector could be adversely affected by the resulting financial and economic environment. The sovereign debt crisis in certain Eurozone countries could also negatively impact insurers’ balance sheets, resulting in associated solvency issues. Further, insurance regulators worldwide have responded to the sovereign credit risk, equity risk and current economic cycle by imposing or contemplating new or stricter regulatory measures and increased solvency requirements, all of which could have an adverse effect on us.
The financial crisis created substantial financial performance challenges associated with the prolonged low interest rate environment. In response, we have adjusted the duration and composition of our asset portfolio. Should these challenges continue for an extended period of time, the risk of achieving adequate returns will be greater and could have an adverse effect on our business, results of operations and competitiveness of our products in the market.
United Kingdom’s vote to leave the European Union
On June 23, 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union (“E.U.”), commonly referred to as “Brexit.” As a result of the referendum, the British government is evaluating the terms of the United Kingdom’s future relationship with the E.U. Although it is still unknown what those terms will be, it may create, in the short-term, regulatory and foreign exchange rate uncertainty with respect to our Lloyd's syndicate operations.
Our insurance and reinsurance subsidiaries are subject to risk-based capital and solvency requirements in their respective regulatory domiciles.
A risk-based capital system is designed to measure whether the amount of available capital is adequate to support the inherent specific risks of each insurer. Risk-based regulatory capital is calculated at least annually. Authorities use the risk-based capital formula to identify insurance companies that may be undercapitalized and thus may require further regulatory attention. The formulas prescribe a series of risk measurements to determine a minimum capital amount for an insurance company, based on the profile of the individual company. The ratio of a company’s actual policyholder surplus to its minimum capital requirements will determine whether any regulatory action is required based on the respective local thresholds.
Whereas the majority of our operations operate on the basis of ‘standard formula’ risk-based capital systems, the Argo Lloyd’s Platform has secured approval from Lloyd’s for the use of customized Economic Capital Models, known as the Internal Models. These models are used to calculate regulatory capital requirements based on each Syndicate’s unique risk profile. The Internal Models have been subject to extensive internal and external scrutiny including independent validation activities. The use of any complex mathematical model however exposes the organization to the risk that these models are not built correctly, contain coding or formulaic errors or rely on unreliable or inadequate data.
As a result of these and other requirements, we may have future capital requirements and such capital may not be available to us on commercially favorable terms. Regulatory capital and solvency requirements for our future capital requirements depend on many factors, including our ability to underwrite new business, risk propensity and ability to establish premium rates and accurately set reserves at levels adequate to cover expected losses. To the extent that the funds generated by insurance premiums received and sale proceeds and income from our investment portfolio are insufficient to fund future operating requirements and cover incurred losses and loss expenses, we may need to raise additional funds or curtail our growth and reduce in size. The prolonged effects of the most recent financial market crisis created uncertainty in the equity and fixed maturity securities markets and could have affected our ability, and the ability of others within our industry, to raise additional capital in the public or private markets. Any future financing, if available at all, may be on terms that are not favorable to us and our shareholders. In the case of equity financing, dilution to current shareholdings could result, and the securities issued may have rights, preferences and privileges that are senior or otherwise superior to those of our common shares.
United States
Argo Group’s U.S. subsidiaries are subject to the risk-based capital system outlined in the Risk-Based Capital for Insurers Model Act. The Risk-Based Capital for Insurers Model Act provides four levels of regulatory activity if the risk-based capital ratio yielded by the calculation falls below specified minimums. At each of four successively lower risk-based capital ratios specified by statute, broader regulatory remedies become available. The four levels are: (i) Company Action Level Event, (ii) Regulatory Action Level Event, (iii) Authorized Control Level Event and (iv) Mandatory Control Level Event. If we fall below the minimum acceptable risk-based capital level, we would be subject to additional regulatory actions.

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European Union
Solvency II (“S II”) is the enhanced EU regulatory regime providing for a risk-based system for the supervision of European insurance and reinsurance undertakings. It imposes new solvency and governance requirements across all 27 European Union Member States to be implemented through the European Insurance and Occupational Pensions Agency (“EIOPA”).
United Kingdom
Syndicate 1200, Syndicate 1910 and SPA 6117 are managed by Argo Managing Agency Limited and are subject to the risk-based capital requirements administered by the Prudential Regulation Authority (“PRA”), and are also subject to S II risk-based capital requirements, as discussed above. Lloyd’s has established its own requirements for S II with which Syndicate 1200, Syndicate 1910 and SPA 6117 must comply.
Bermuda
Argo Group and Argo Re
As discussed in the summary of regulatory provisions above relating to Argo Group and Argo Re in Bermuda, Argo Re is subject to the Bermuda Solvency Capital Requirement (“BSCR”), a risk-based capital system mandated by the Bermuda Insurance (Prudential Standards) (Class 4 and Class 3B Solvency Requirement) Rules, as amended from time to time. Similarly, Argo Group is subject to the Insurance (Prudential Standards) (Insurance Group Solvency Requirement) Rules 2011 as amended from time to time. The application and methods of calculating the BSCR required by the Bermuda Monetary Authority (“BMA”) are subject to change, and the ultimate impact on our solvency position from any future material changes cannot be determined at this time.

Minimum Solvency Margin
Argo Re must ensure that the value of its general business assets exceeds the amount of its general business liabilities by an amount greater than the prescribed minimum solvency margin (“MSM”) pertaining to its general business. As a Class 4 insurer, Argo Re is required, with respect to its general business, to maintain a minimum solvency margin equal to the greatest of (A) $100 million, (B) 50% of net premiums written (being gross premiums written less any premiums ceded by Argo Re, but Argo Re may not deduct more than 25% of gross premiums when computing net premiums written) and (C) 15% of net discounted aggregate losses and loss expense provisions and other insurance reserves.  Argo Group is supervised by the BMA as an Insurance Group, and must ensure that the value of the Insurance Group’s assets exceeds the Insurance Group’s liabilities by the aggregate MSM of each qualifying member of the Insurance Group.
Enhanced Capital Requirement
Argo Group, as a BMA supervised Insurance Group, and Argo Re, as a Class 4 insurer, are required to maintain available statutory capital and surplus pertaining to its general business at a level equal to or in excess of its enhanced capital requirement (“ECR”). The ECR is established by reference to either the BSCR model or an approved internal capital model, but must be equal to or exceed the MSM for the insurer. The BSCR is a risk-based capital model which provides a method for determining an insurer’s capital requirements (statutory capital and surplus) by taking into account the risk characteristics of different aspects of the insurer’s business. The BMA may, subject to compliance with the relevant provisions of the Insurance Act, make such adjustments to an insurer’s ECR and available statutory capital and surplus requirements as it considers appropriate.
Target Capital Level
Although not a metric specifically defined in the Insurance Act, the BMA has the authority to and has established a target capital level (“TCL”) for each Class 4 insurer equal to 120% of an insurer’s ECR. The purpose of the TCL is to serve as an early warning tool for the BMA. Failure to maintain statutory capital at or above the TCL will likely result in increased regulatory oversight.
Eligible Capital
Under the respective systems applied to Argo Re as an insurer and Argo Group as an Insurance Group supervised by the BMA, all capital instruments at Argo Group and Argo Re will be classified as either basic or ancillary capital, which in turn will be classified into one of three tiers based on their “loss absorbency” characteristics. Highest quality capital will be classified Tier 1 Capital; lesser quality capital will be classified as either Tier 2 Capital or Tier 3 Capital. Under this regime, not less than 80% of Tier 1 Capital and up to 20% of Tier 2 Capital may be used to support the company’s minimum solvency margin for the filing entity’s general business. Thereafter, a minimum of 60% of Tier 1 Capital and a maximum of 15% of Tier 3 Capital may be used to satisfy the filing entity’s ECR. Any combination of Tier 1, 2 or 3 Capital may be used to meet the TCL. With respect to Argo Group, the Insurance (Prudential Standards) (Insurance Group

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Solvency Requirement) Amendment Rules 2012 provide for a phase-in over a period of six years, starting at 50% of the amount determined and increasing in 10% increments. Where the BMA has previously approved the use of certain instruments for capital purposes, the BMA’s consent must be obtained if such instruments are to remain eligible for use in satisfying the minimum margin of solvency pertaining to the filing entity general business and it’s ECR. The BMA has during 2017 provided further guidance on how the Insurance (Eligible Capital) Rules 2012(“Eligible Capital Rules”) will be applied in practice to insurers. Market practice on the application of these Eligible Capital Rules remain subject to change and no assurance be provided over the ongoing regulatory treatment of Argo Group and Argo Re’s capital structures.
Minimum Liquidity Ratio
Argo Re is required to maintain a minimum liquidity ratio for general business equal to the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include cash and time deposits, quoted investments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiums receivable and reinsurance balances receivable. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax and sundry liabilities (by interpretation, those not specifically defined).
Restrictions on Dividends and Distributions
Argo Re is prohibited from declaring or paying any dividends during any financial year if it is in breach of its ECR, general business solvency margin or minimum liquidity ratio or if the declaration or payment of such dividends would cause such a breach. If it has failed to meet its minimum margin of solvency or minimum liquidity ratio on the last day of any financial year, Argo Re will be prohibited, without the approval of the BMA, from declaring or paying any dividends during the next financial year. In addition, Argo Re is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year’s statutory balance sheet) unless it files (at least 7 days before payment of such dividends) with the BMA an affidavit stating that it will continue to meet the required margins.
As discussed in the regulatory section above, Argo Group and its various subsidiaries are considered to be an affiliated group for purposes of the BMA’s Group Supervision regime. This Group Supervision regime stipulates solvency margins, capital requirements and eligible capital requirements at the consolidated Argo Group level that may affect the calculation of similar solvency and capital requirements at the Argo Re level. The methodology for applying these solvency and capital requirements, particularly in regard to the eligibility, and classification of certain capital instruments within an affiliated group, is subject to ongoing refinement and interpretation by the BMA. The applicable rules and regulations for this regime, and the manner in which they will be applied to Argo Group, are subject to change, and it is not possible to predict the ultimate impact of future changes on Argo Group’s operations and financial condition.
We may incur significant additional indebtedness.
We may seek to incur additional indebtedness either through the issuance of public or private debt or through bank or other financing. The funds raised by the incurrence of such additional indebtedness may be used to repay existing indebtedness, including amounts borrowed under our credit facility, outstanding subordinated debt and floating rate loan stock or for our general corporate purposes, including additions to working capital, capital expenditures, investments in subsidiaries or acquisitions.
This additional indebtedness, particularly if not used to repay existing indebtedness, could limit our financial and operating flexibility, including as a result of the need to dedicate a greater portion of our cash flows from operations to interest and principal payments. It may also be more difficult for us to obtain additional financing on favorable terms, if at all, limiting our ability to capitalize on significant business opportunities and making us more vulnerable to economic downturns.
Argo Group is a holding company and if its subsidiaries do not make dividend payments to Argo Group, Argo Group may not be able to pay dividends or other obligations.
Argo Group is a holding company with no significant operations or significant assets other than the share capital of its subsidiaries. Argo group relies primarily on cash dividends from its subsidiaries to pay operating expenses and obligations. It is expected that future distributions from these subsidiaries will be the principal source of funds to meet financial obligations and pay shareholder dividends. The payment of dividends by the insurance and reinsurance subsidiaries is limited under the laws and regulations of the respective domicile. These regulations stipulate the maximum amount of annual dividends or other distributions available to shareholders without prior approval of the relevant regulatory authorities. Thus, cash resources located in subsidiaries may not be readily available to Argo Group in whole or in part to address its liquidity needs.

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There can be no assurance that we and our subsidiaries will not experience a ratings downgrade, which may result in an adverse effect on our business, financial condition and operating results.
Ratings with respect to claims paying ability and financial strength are important factors in establishing the competitive position of insurance companies and will also impact the cost and availability of capital to an insurance company. Ratings by A.M. Best and S&P represent an important consideration in maintaining customer confidence in us and in our ability to market insurance products. Rating organizations regularly analyze the financial performance and condition of insurers.
All of our insurance and reinsurance subsidiaries, except for Argo Seguros (which is not rated), have a Financial Strength Rating of “A” (Excellent) (3rd highest rating out of 16 rating classifications) with a stable outlook from A.M Best. In 2018, S&P affirmed our Financial Strength Rating of “A-” (Strong) of our U.S. insurance subsidiaries (other than ARIS Title) with positive outlook. Argo Group U.S., Inc. has an Issuer Credit Rating of “BBB-” (Good) with a positive outlook from S&P. Syndicates 1200 and 1910, our Lloyd’s syndicates, operate with the Lloyd’s market FSR rating of “A” (Excellent) with a stable outlook by A.M. Best and “A+” (Strong) with a negative outlook by S&P.
Our ratings are subject to periodic review by these agencies and the maintenance of those ratings cannot be assured. A significant downgrade in these ratings could adversely affect our competitive position in the insurance industry, make it more difficult for us to market our products, result in a material loss of business as policyholders move to other companies with higher claims-paying and financial strength ratings and may require us to raise additional capital.
Our merger and acquisition strategy may not succeed.
Our strategy for growth may include mergers and acquisitions. This strategy presents risks that could have a material adverse effect on our business and financial performance, including: (i) the diversion of management’s attention, (ii) our ability to execute a transaction effectively, including the integration of operations and the retention of employees and (iii) the contingent and latent risks associated with the past operations of and other unanticipated problems arising from a transaction partner. We cannot predict whether we will be able to identify and complete a future transaction on terms favorable to us. We cannot know if we will realize the anticipated benefits of a completed transaction or if there will be substantial unanticipated costs associated with such a transaction.
A future merger or acquisition may result in tax consequences at either or both the shareholder and Argo Group level, potentially dilutive issuances of our equity securities, the incurrence of additional debt and the recognition of potential impairment of goodwill and other intangible assets. Each of these factors could adversely affect our financial position.
Argo Re’s inability to provide the necessary collateral could affect Argo Re’s ability to offer reinsurance in certain markets.
Argo Re, the Bermuda Class 4 risk bearing entity, is licensed as a reinsurer in Panama, Ecuador and Bermuda. Because many jurisdictions do not permit insurance companies to take credit for reinsurance obtained from unlicensed or non-admitted insurers in statutory financial statements unless appropriate security is in place, Argo Re anticipates that its reinsurance clients will typically require it to post a letter of credit or other collateral for incurred losses. If Argo Re is unable to arrange for security on commercially reasonable terms, Argo Re could be limited in its ability to underwrite business for certain of its clients.
Reputational Risk
Reputational Risk is the risk of potential loss through a deterioration of our reputation or standing due to a negative perception of our image among customers, counterparties, shareholders or supervisory authorities, and includes risk of adverse publicity regarding our business practices and associations. While we assess the reputational impact of all reasonably foreseeable material risks within our risk management processes we also recognize a number of specific reputational risks.

We are subject to laws and regulations relating to sanctions, anti-corruption and money laundering, the violation of which could adversely affect our operations.
Our activities are subject to applicable economic and trade sanctions, money laundering regulations, and anti-corruption laws in the jurisdictions where we operate, including Bermuda, the U.K. and the European Community and the U.S., among others. For example, we are subject to The Bribery Act, 2016, the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010, which, among other matters, generally prohibit corrupt payments or unreasonable gifts to foreign governments or officials. We maintain oversight and control through the deployment of our internal Group-wide Corporate Governance Guidelines and Code of Conduct and Business Ethics and associated policies and procedures. Although we have in place systems and controls designed to comply with applicable laws and regulations (including continuing education and training programs), there is a risk that those systems and controls will not always be effective to achieve full compliance, as those laws and regulations are interpreted by the relevant authorities. Failure to accurately interpret

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or comply with or obtain appropriate authorizations and/or exemptions under such laws or regulations could subject us to investigations, criminal sanctions or civil remedies, including fines, injunctions, loss of an operating license, reputational consequences, and other sanctions, all of which could damage our business or reputation. Such damage could have a material adverse effect on our financial condition and results of operations.
 
Regulatory and Litigation Risks
Legal and Regulatory Risk means the risk arising from our (a) failure to comply with statutory or regulatory obligations; (b) failure to comply with our bye-laws; or (c) failure to comply with any contractual agreement.
Litigation Risk means the risk that acts or omissions or other business activity of Argo Group and our key functionaries and employees could result in legal proceedings to which we are a party, the uncertainty surrounding the outcome of such legal proceedings and the risk of an adverse impact on us resulting from such legal proceedings.
Litigation and legal proceedings against us could have an adverse effect on our financial condition.
Our subsidiaries are parties to legal actions incidental to their business. Adverse outcomes could materially affect our financial condition or results of operations.
Regulatory constraints may restrict our ability to operate our business.
General Regulatory Constraints
Restrictions on Ownership
Argo Group’s ownership of U.S. subsidiaries can, under applicable state insurance company laws and regulations, delay or impede a change of control of Argo Group. Under applicable insurance regulations, any proposed purchase of 10% or more of Argo Group’s voting securities would require the prior approval of the relevant insurance regulatory authorities.
Except as provided below, shareholders have one vote for each common share held by them and are entitled to vote at all meetings of shareholders. However, for so long as the shares of a shareholder are treated as “controlled shares” (as determined under section 958 of the Internal Revenue Code) of any U.S. Person (that owns shares directly or indirectly through non-U.S. entities) and such controlled shares constitute 9.5% or more of the votes conferred by our issued shares, the voting rights with respect to the controlled shares of such U.S. Person, which we refer to as a 9.5% U.S. Shareholder, will be limited, in the aggregate, to a voting power of less than 9.5% under a formula specified in our bye-laws. The formula is applied repeatedly until the voting power of all 9.5% U.S. Shareholders has been reduced to less than 9.5%. In addition, our Board of Directors may limit a shareholder’s voting rights where it deems it appropriate to do so to (i) avoid the existence of any 9.5% U.S. Shareholder and (ii) avoid certain material adverse tax, legal or regulatory consequences to Argo Group, any of its subsidiaries or any direct or indirect shareholder or its affiliates. “Controlled shares” include, among other things, all shares of Argo Group that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Internal Revenue Code).
Under these provisions, certain shareholders may have their voting rights limited, while other shareholders may have voting rights in excess of one vote per share. Moreover, these provisions could have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct share ownership.
Regulation of Subsidiaries
General
Our insurance and reinsurance subsidiaries and insurance-related services subsidiaries may not be able to obtain or maintain necessary licenses, permits or authorizations, or may be able to do so only at significant cost. In addition, we may not be able to comply with, or obtain appropriate exemptions from the wide variety of laws and regulations applicable to insurance or reinsurance companies or insurance-related services companies or holding companies. Failure to comply with or to obtain appropriate authorizations and/or exemptions under any applicable laws could result in restrictions on our ability to do business or certain activities that are regulated in one or more of the jurisdictions and could subject us to fines and other sanctions, which could have a material adverse effect on our business.
Argo Group International Holdings, Ltd
Argo Group is supervised by the BMA as an Insurance Group, and as such, is subject to specific laws, rules and regulations promulgated by the Bermudian authorities according to the Insurance Act. Changes in Bermuda’s statutes, regulations and policies could result in

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restrictions on our ability to pursue our business plans, strategic objectives, execute our investment strategy and fulfill other shareholders’ obligations.
Argo Group’s U.S. Subsidiaries
Our U.S. insurance subsidiaries are subject to regulation, which may reduce our profitability or inhibit our growth. If we fail to comply with these regulations, we may be subject to penalties, including fines and suspensions, which may adversely affect our financial condition and results of operations. Finally, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could adversely affect our ability to pursue our business plan and operate our U.S. insurance subsidiaries.
Our insurance subsidiaries are subject to the supervision and regulation of each of the states in which they are domiciled and do business. Such supervision and regulation is designed to protect our policyholders rather than our shareholders. These regulations are generally administered by a department of insurance in each state and relate to various aspects of our business. State insurance departments also conduct periodic examinations of the affairs of insurance and reinsurance companies and require the filing of annual and other reports relating to financial condition, holding company issues and other matters. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives.
In addition, regulatory authorities have relatively broad discretion to deny, suspend or revoke licenses for various reasons, including the violation of regulations. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities may preclude or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us. This could adversely affect our ability to operate our business.
From time to time, various laws and regulations are proposed for application to the U.S. insurance industry, some of which could adversely affect the results of reinsurers and insurers. Among the proposals that have been considered are those that would establish a federal system of regulation in addition to or in lieu of a state-based system of regulation and repeal the McCarran-Ferguson Act and/or measures under the Dodd-Frank Act that have established the Federal Insurance Office. Additionally, the National Association of Insurance Commissioners (“NAIC”) has undertaken the Solvency Modernization Initiative (“SMI”), the primary focus of which is the review of insurer solvency regulations throughout the U.S. and the development of long-term solvency modernization objectives. Included within NAIC’s scope of review for SMI purposes, is the U.S. insurer solvency framework, group solvency issues, capital requirements, international accounting and regulatory standards, reinsurance and corporate governance. As a part of SMI, insurance regulation was promulgated to establish the Own Risk and Solvency Assessment ("ORSA"). An ORSA requires insurance companies to issue their own assessment of their current and future risk through an internal risk self-assessment process and is intended to provide U.S. insurance regulators with an opportunity to form an enhanced view of an insurer's ability to withstand financial stress.
We are unable to predict the potential effect, if any, such legislative or regulatory developments may have on our future operations or financial condition.
Argo Group’s Bermuda Subsidiaries
Argo Re is registered as a Class 4 Bermuda insurance company and is subject to regulation and supervision in Bermuda by the BMA. Changes in Bermuda insurance statutes, regulations and policies could result in restrictions on Argo Re’s ability to pursue its business plans, issue reinsurance policies, distribute funds and execute its investment strategy.
Ariel Re Bda Limited is licensed by the BMA pursuant to Section 10 of the Insurance Act 1978 as an Insurance Agent and as an Insurance Manager. Changes in the applicable laws and regulations could result in restrictions on ArgoGlobal Underwriting (Dubai) Ltd.’s ability to pursue its business strategy.
U.K. Prudential Regulation Authority and Financial Conduct Authority Regulations
Since 2014 the regulatory supervision over of Argo Managing Agency Limited, the managing agent of Syndicate 1200, Syndicate 1910 and SPA 6117 has been performed by the PRA and the FCA. The operations of Syndicate 1200, Syndicate 1910 and SPA 6117 continue to be supervised by Lloyd’s. The PRA, FCA and Lloyd’s have common objectives in ensuring that the Lloyd’s market is appropriately regulated. To minimize duplication, there are arrangements in place with Lloyd’s for cooperation in the areas of supervision and enforcement. Both the PRA and FCA have substantial powers of intervention in relation to the Lloyd’s Managing Agents (such as Argo Managing Agency Limited) that they regulate, including the power to remove their authorization to manage Lloyd’s Syndicates. In addition, each year the PRA requires Lloyd’s to satisfy an annual solvency test that measures whether Lloyd’s has sufficient assets in the aggregate to meet all outstanding liabilities of its members, both current and run-off. If Lloyd’s fails this test, the PRA may require Lloyd’s to cease trading and/or its members to cease or reduce underwriting. Future regulatory changes or rulings by the PRA and/or

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FCA could interfere with the business strategy or financial assumptions of the Syndicates, possibly resulting in an adverse effect on the financial condition and operating results of the Syndicates.
Lloyd’s Regulations and Requirements
The operations of Syndicate 1200, Syndicate 1910 and SPA 6117 are supervised by Lloyd’s. The Lloyd’s Franchise Board requires annual approval of Syndicate 1200’s, Syndicate 1910’s and SPA 6117’s business plans, including maximum underwriting capacity, and may require changes to any business plan presented to it or additional capital to be provided to support underwriting. Lloyd’s also imposes various charges and assessments on its member companies. If Lloyd’s were to require material changes in the Syndicates’ business plans, or if charges and assessments payable by by Syndicate 1200, Syndicate 1910 and SPA 6117 to Lloyd’s were to increase significantly, these events could have an adverse effect on the operations and financial results of Syndicate 1200, Syndicate 1910 and SPA 6117. In addition, no assurances can be given as to how much business Lloyd’s will permit the Syndicates to underwrite in 2019 and subsequent years nor the viability and cost of the capital structure we may use as a substitute for the external capital and reinsurance used by the Syndicates in 2018 and prior underwriting years.
The financial security of the Lloyd’s market is regularly assessed by three independent rating agencies (A.M. Best, S&P and Fitch Ratings). A satisfactory credit rating issued by an accredited rating agency is necessary for Lloyd’s Syndicates to be able to trade in certain classes of business or certain jurisdictions at current levels. Syndicate 1200, Syndicate 1910 and SPA 6117 would be adversely affected if Lloyd’s current ratings were downgraded. Our Lloyd's syndicates currently operate with the Lloyd's market FSR rating of "A" (Excellent) with a stable outlook by A.M. Best and "A+" (Strong) with a negative outlook by S&P.
Other Applicable Laws
Lloyd’s worldwide insurance and reinsurance business is subject to various regulations, laws, treaties and other applicable policies of the EU, as well as those of each nation, state and locality in which Lloyd’s operates. Material changes in governmental requirements and laws could have an adverse effect on Lloyd’s and its member companies and syndicates, including Syndicate 1200, Syndicate 1910 and SPA 6117.
Malta Financial Services Authority (“MFSA”) & Swiss Financial Market Supervisory Authority (“FINMA”)
ArgoGlobal SE, domiciled in Malta, is authorized by the MFSA to carry on the business of insurance under the Insurance Business Act (Cap. 403). In addition, ArgoGlobal SE is subject to regulation by the EU and its third party branch office in Switzerland is subject to regulation by FINMA. Changes in the applicable laws, regulations and supplementing rules could interfere with ArgoGlobal SE’s business strategy or financial assumptions, possibly resulting in an adverse effect on ArgoGlobal SE’s financial condition and operating results.
Institute for the Supervision of Insurance (“IVASS”)
ArgoGlobal Assicurazioni S.p.A, domiciled in Italy, is authorized by IVASS to carry on the business of insurance under ISVAP No. 2581 as of the January 21, 2008. ArgoGlobal Assicurazioni S.p.A is enrolled in the Register of Insurance Companies under No. 1.00163. In addition, ArgoGlobal Assicurazioni S.p.A is subject to regulation by the EU. Changes in the applicable laws, regulations and supplementing rules could interfere with ArgoGlobal Assicurazioni S.p.A’s business strategy or financial assumptions, possibly resulting in an adverse effect on ArgoGlobal Assicurazioni S.p.A’s financial condition and operating results.
Brazil’s Superintendệncia de Seguros Privados, Superintendence of Private Insurance, (“SUSEP”)
Argo Seguros, domiciled in Brazil, is authorized to operate as a licensed insurer by the Superintendệncia de Seguros Privados, (“SUSEP”) per Ordinance nº 4.316 issued in 2011. Brazil’s insurance regulatory regime contains provisions which restrict the amount of reinsurance a domestic insurer may place with reinsurers and places limits on the amount of reinsurance that may be placed with affiliates. Such restrictions constrain the size and category of risks that Argo Seguros can retain and require that Argo Seguros be capitalized at a level that is comparatively higher than in other jurisdictions in which Argo Group maintains its insurer and/or reinsurer subsidiaries. Failure to manage the impact of such restrictions within its business plan, as well as changes in the applicable laws, rules and supplementing resolutions, could possibly result in an adverse effect on Argo Seguros’ financial condition and operating results.
Argo Re Ltd. is registered by SUSEP as an admitted reinsurer under the applicable laws and regulations of Brazil and is authorized to carry on such business through its representative office, Argo Re Escritório de Representação no Brasil Ltda. (“Argo Re Escritório”) in São Paulo, Brazil, per Ordinance nº 5.795. Changes in the applicable laws and regulations could possibly result in an adverse effect on Argo Re, Ltd.’s financial condition and operating results.

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Dubai Financial Services Authority (“DFSA”)
ArgoGlobal Underwriting (Dubai) Ltd. is licensed to operate as an Authorized Firm (Category 4) to carry on financial services in the area of “insurance management” and “insurance intermediation.” Changes in the applicable laws and regulations could possibly result in an adverse effect on ArgoGlobal Underwriting (Dubai) Ltd.’s financial condition and operating results.
Monetary Authority of Singapore (“MAS”)
ArgoGlobal Underwriting Asia Pacific Pte. Ltd. is licensed by the MAS to participate on the Lloyd’s Asia Scheme and provide insurance intermediation services to Syndicate 1200. Changes in the applicable laws and regulations could possibly result in an adverse effect on ArgoGlobal Underwriting Asia Pacific Pte. Ltd.’s financial condition and operating results.
Special Selected Risk Factors
An impairment in the carrying value of goodwill and other intangible assets could negatively impact our consolidated results of operations and shareholders’ equity.
Goodwill and other intangible assets are originally recorded at fair value. Goodwill is not amortized while certain other intangible assets are amortized over their estimated useful lives or have indefinite useful lives. Goodwill and other intangible assets are reviewed for impairment at least annually or more frequently if indicators are present. Management, in evaluating the recoverability of such assets, relies on estimates and assumptions related to margin, growth rates, discount rates and other data. There are inherent uncertainties related to these factors and management’s judgment in applying these factors. Goodwill and other intangible asset impairment charges can result from declines in operating results, divestitures or sustained market capitalization declines and other factors. Impairment charges could materially affect our financial results in the period in which they are recognized. As of December 31, 2018, goodwill and other intangible assets represented approximately 15% of shareholders’ equity. We continue to monitor relevant internal and external factors and their potential impact on the fair value of our reporting segments, and if required, we will update our impairment analysis.
Some aspects of our corporate structure and applicable insurance regulations may discourage or impede the sale of the Company, tender offers or other mechanisms of control.
Restrictions in Bye-Laws on Stock Transfers
Our bye-laws generally permit transfers of our common shares unless the Board of Directors determines a transfer may result in a non-de minimus adverse tax, legal or regulatory consequence to us, any of our subsidiaries or any direct or indirect shareholder of Argo Group or its affiliates. We may refuse to register on our share transfer records, any transfer that does not comply with these share transfer restrictions. A transferee will be permitted to promptly dispose of any of our shares purchased that violate the restrictions and as to the transfer of which registration is refused.
Restrictions on Voting Rights
In the event that we become aware of a U.S. Person (that owns our shares directly or indirectly through non-U.S. entities) owning more than the permitted 9.5% level of voting power of our outstanding shares after a transfer of shares has been registered, our bye-laws provide that, subject to certain exceptions and waiver procedures, the voting rights with respect to our shares owned by any such shareholder will be limited to the permitted level of voting power, subject only to the further limitation that no other shareholder allocated any such voting rights may exceed the permitted level of voting power as a result of such limitation.
We also have the authority under our bye-laws to request information from any shareholder for the purpose of determining whether a shareholder’s voting rights are to be reallocated under the bye-laws. If a shareholder fails to respond to such a request for information or submits incomplete or inaccurate information in response to such a request, we may, at our sole discretion, eliminate such shareholder’s voting rights.
Election of Board of Directors
Our bye-laws provide for a classified board of directors. The directors of the class elected at each annual general meeting hold office for a term of three years, with the term of each class expiring at successive annual general meetings of shareholders. Under our bye-laws, the vote of two-thirds of the outstanding shares entitled to vote and approval of a majority of the Board of Directors are required to amend bye-laws regarding appointment and removal of directors, indemnification of directors and officers, directors’ interests and procedures for amending bye-laws.

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Insurance laws and other applicable regulations regarding change of control
Because a person who acquires control of Argo Group would thereby acquire indirect control of the same percentage of the stock in its insurance company subsidiaries, change of control provisions in the laws and other rules applicable to our insurance subsidiaries in various jurisdictions would apply to such a transaction. Such change of control provisions generally apply to transactions involving the acquisition of direct or indirect control over 10% or more of our outstanding shares. No assurance can be given that an applicable regulatory body would approve of any future change of control. These change of control provisions may discourage potential acquisition proposals and may delay, deter or prevent a change of control of Argo Group, including transactions that some or all of our shareholders might consider to be desirable.
Restrictions on Third-Party Takeovers
The provisions described above may have the effect of making it more difficult or discouraging unsolicited takeover bids from third parties. To the extent that these effects occur, shareholders could be deprived of opportunities to realize takeover premiums for their shares and the market price of their shares could be depressed. In addition, these provisions could also result in the entrenchment of incumbent management and Board of Directors members.
We are a Bermuda company and it may be difficult for you to enforce judgments against us and/or our directors and executive officers.
We are organized under the laws of Bermuda and headquartered in Bermuda. The Companies Act 1981 of Bermuda, and its subsequent amendments, which applies to us, differs in certain material respects from laws generally applicable to U.S. corporations and their shareholders. These differences include the manner in which directors must disclose transactions in which they have an interest, rights of shareholders to bring class action and derivative lawsuits, our right to enter into business transactions with shareholders without prior approval from shareholders, committee organization and scope of indemnification available to directors and officers.
In addition, certain of our directors and officers reside outside the U.S. As such, it may be difficult for investors to effect service of process within the U.S. on our directors and officers who reside outside the U.S. or to enforce against us or our directors and officers judgments of U.S. courts, predicated upon the civil liability provisions of the U.S. federal securities laws.
We have been advised that there is doubt as to whether:
a holder of our common shares would be able to enforce, in the courts of Bermuda, judgments of U.S. courts against persons who reside in Bermuda based upon the civil liability provisions of the U.S. federal securities laws;
a holder of our common shares would be able to enforce, in the courts of Bermuda, judgments of U.S. courts based upon the civil liability provisions of the U.S. federal securities laws; and
a holder of our common shares would be able to bring an original action in the Bermuda courts to enforce liabilities against us or our directors or officers, as well as our independent accountants, who reside outside the U.S. based solely upon U.S. federal securities laws.
Further, we have been advised that there is no treaty in effect between the U.S. and Bermuda providing for the enforcement of judgments of U.S. courts, and there are grounds upon which Bermuda courts may not enforce judgments of U.S. courts. Because judgments of U.S. courts are not automatically enforceable in Bermuda, it may be difficult for our shareholders to recover against us based on such judgments.
Tax Risks Associated with Argo Group
U.S. Tax Risks
Argo Group and Argo Group’s non-U.S. subsidiaries may be subject to U.S. tax, which may have a material adverse effect on our financial condition and operating results.
Argo Group and Argo Group’s non-U.S. subsidiaries have operated and intend to continue to operate in a manner that should not cause them to be treated as engaged in a trade or business in the U.S. (and, in the case of those non-U.S. companies qualifying for treaty protection, in a manner that should not cause any of such non-U.S. subsidiaries to be doing business through a permanent establishment in the U.S.) and, thus, we believe that we and our non-U.S. subsidiaries should not be subject to U.S. federal income taxes or branch profits tax (other than withholding taxes on certain U.S. source investment income and excise taxes on insurance or reinsurance premiums). However, because there is uncertainty as to the activities that constitute being engaged in a trade or business within the U.S., and as to what constitutes a permanent establishment under the applicable tax treaties, there can be no assurances that the United States Internal Revenue Service (“IRS”) will not contend successfully that one or more of the non-U.S. subsidiaries is engaged in a trade or business, or carrying on business through a permanent establishment, in the U.S.

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The reinsurance agreements between us and our U.S. subsidiaries may be subject to re-characterization or other adjustment for U.S. federal income tax purposes, which may have a material adverse effect on our financial condition and operating results.
Under Section 845 of the Internal Revenue Code, the IRS may allocate income, deductions, assets, reserves, credits and any other items related to a reinsurance agreement among certain related parties to the reinsurance agreement, re-characterize such items or make any other adjustment in order to reflect the proper source, character or amount of the items for each party. No regulations have been issued under Section 845 of the Internal Revenue Code. Accordingly, the application of such provisions is uncertain and we cannot predict what impact, if any, such provisions may have on us and our subsidiaries.
Changes in U.S. federal income tax law could be retroactive and may subject us or our non-U.S. subsidiaries to U.S. federal income taxation.
The TCJA was passed by the U.S. Congress and signed into law on December 22, 2017. Part of the new law, amongst other things, is intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the U.S. but have certain U.S. affiliates by introducing a new minimum Base Erosion and Anti-abuse Tax (BEAT) on the U.S. affiliates. A significant affiliated company adjustment utilized to compute the BEAT liability is in regards to reinsurance premiums paid by U.S. affiliates to non-U.S. affiliates. Although we are currently unable to predict the ultimate impact of the TCJA on our business and operations, the tax liability of the U.S taxpaying affiliates may increase as a result of affiliated reinsurance transactions and could adversely impact our results.
It is possible that broader-based or new legislative proposals could emerge in the future that could have an adverse effect on us or our shareholders. The tax laws and interpretations thereof are subject to change, possibly on a retroactive basis. We are not able to predict if, when or in what form such changes will be provided and whether such guidance will be applied on a retroactive basis.
Bermuda Tax Risks
Argo Group and Argo Group’s Bermuda subsidiaries may become subject to Bermuda taxes after 2035.
Bermuda currently imposes no income tax on corporations. In addition, we have obtained an assurance from the Bermuda Minister of Finance, under The Exempted Undertakings Tax Protection Act 1966 of Bermuda, that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to us or our Bermuda subsidiaries, until March 31, 2035. During 2011, legislation was passed to extend the period of the assurance mentioned above from 2016 to March 31, 2035. We filed for, and received, an extension of the assurance in January of 2012.
U.K. Tax Risks
Our non-U.K. companies may be subject to U.K. tax.
We intend to operate in such a manner so that none of our companies other than those companies incorporated in the United Kingdom should be resident in the U.K. for tax purposes or have a permanent establishment in the U.K. We expect that none of our companies other than Syndicate 1200 and Syndicate 1910 should be subject to U.K. taxation. However, since applicable law and regulations do not conclusively define the activities that constitute conducting business in the U.K. through a permanent establishment, the U.K. Inland Revenue might contend successfully that one or more of our other companies is conducting business in the U.K. through a permanent establishment in the U.K.
Any arrangements between U.K.-resident entities of Argo Group and other entities of Argo Group are subject to the U.K. transfer pricing regime. Consequently, if any agreement between a U.K. resident entity of Argo Group and any other Argo Group entity (whether that entity is resident in or outside of the U.K.) is found not to be on arm’s length terms and as a result a U.K. tax advantage is being obtained, an adjustment will be required to compute U.K. taxable profits as if such an agreement were on arm’s length terms. Any transfer pricing adjustment could adversely impact the tax charge incurred by the relevant U.K. resident entities of Argo Group.
Irish Tax Risks
Dividends paid by our U.S. subsidiaries to Argo Ireland may not be eligible for benefits under the U.S.-Ireland income tax treaty.
Under U.S. federal income tax law, dividends paid by a U.S. corporation to a non-U.S. shareholder are generally subject to a 30% withholding tax, unless reduced by treaty. The income tax treaty between the Republic of Ireland and the United States (“the Irish Treaty”) reduces the rate of withholding tax on certain dividends to 5%. Were the IRS to contend successfully that Argo Financial Holdings, Ltd (“Argo Ireland”) is not eligible for benefits under the Irish Treaty, any dividends paid by Argo Group’s U.S. subsidiaries to Argo Ireland

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would be subject to the 30% withholding tax. Such a result could have a material adverse effect on our financial condition and operating results.
Tax Risks Associated with Our Shareholders
If you are a U.S. non-corporate shareholder, dividends you receive from us will not be eligible for reduced rates of tax upon enactment of certain legislative proposals.
Legislation has been introduced in the U.S. Congress that would, if enacted, deny the applicability of reduced rates to dividends paid by any corporation organized under the laws of a foreign country that does not have a comprehensive income tax system, such as Bermuda. Therefore, depending on whether, when and in what form this legislative proposal is enacted, we cannot assure you that any dividends paid by us in the future would qualify for reduced rates of tax.
If we are classified as a passive foreign investment company (“PFIC”), your taxes could increase.
In order to avoid significant potential adverse U.S. federal income tax consequences for any U.S. person who owns our common shares, we must not constitute a PFIC in any year in which such U.S. person is a shareholder. Those consequences could include increasing the tax liability of the investor, accelerating the imposition of the tax and causing a loss of the basis step-up on the death of the investor. In general, a non-U.S. corporation is a passive foreign investment company for a taxable year if 75% or more of its income constitutes passive income or 50% or more of its assets produce passive income. Passive income generally includes interest, dividends and other investment income. However, passive income does not include income derived in the active conduct of an insurance business by a company that is predominantly engaged in an insurance business. This exception is intended to ensure that income derived by a bona fide insurance company is not treated as passive income, except to the extent such income is attributable to financial reserves in excess of the reasonable needs of the insurance business. The TCJA modified and limits the potential application of this exception by a non-US insurance company, ultimately applying a more objective test. To now qualify for this exception, a qualifying insurance entity is one that would be taxed as an insurance company if it were a US corporation and maintains insurance liabilities of more than 25% of such company’s assets for a taxable year (or maintains insurance liabilities that at least equal or exceed 10% of its assets and it satisfies a facts and circumstances test that requires showing that the failure to exceed the 25% threshold is due to run-off or rating agency circumstances). The IRS issued proposed regulations intended to clarify the application of the PFIC rules to non-US insurance companies, but these have not been adopted in final form and will not be effective until such time. We believe that we should not be, and currently do not expect to become, a PFIC for U.S. federal income tax purposes; however, we cannot assure you that we will not be deemed a PFIC by the IRS. We cannot predict what impact, if any, such guidance would have on persons subject to U.S. federal income tax that directly or indirectly own our shares.
 If you acquire 10% or more of our shares and we or one or more of our non-U.S. subsidiaries is classified as a controlled foreign corporation (“CFC”) your taxes could increase.
Each U.S. person who, directly, indirectly or through attribution rules, owns 10% or more of our common shares should consider the possible application of the controlled foreign corporation rules.
Each U.S. 10% shareholder of a controlled foreign corporation on the last day of the controlled foreign corporation’s taxable year generally must include in its gross income for U.S. federal income tax purposes its pro-rata share of the controlled foreign corporation’s subpart F income, even if the subpart F income has not been distributed. In general, a non-U.S. insurance company is treated as a controlled foreign corporation only if such U.S. 10% shareholders collectively own more than 25% of the total combined voting power or total value of the company’s capital stock for an uninterrupted period of 30 days or more during any year. We believe that, because of the anticipated dispersion of share ownership among holders and because of the restrictions in our bye-laws on transfer, issuance or repurchase of our common shares, shareholders will not be subject to treatment as U.S. 10% shareholders of a controlled foreign corporation. In addition, because under our bye-laws no single shareholder is permitted to exercise 9.5% or more of the total combined voting power, unless such provision is waived by the unanimous consent of the Board of Directors, we believe that our shareholders should not be viewed as U.S. 10% shareholders of a controlled foreign corporation for purposes of the controlled foreign corporation rules. Notwithstanding the above, it is possible that the CFC rules could be construed by the IRS in the future, or amended, in such a way as to apply to our shareholders.
We cannot assure you that we or our non-U.S. subsidiaries will not be classified as CFCs. We believe that because of the anticipated dispersion of our common share ownership, provisions in our organizational documents that limit voting power and other factors, no United States person who (i) owns our shares directly or indirectly through one or more non-U.S. entities and (ii) has not received a waiver from our Board of Directors of provisions in our organizational documents that limit voting power, should be treated as owning (directly, indirectly through non-U.S. entities or constructively) 10% or more of the total voting power of all classes of the shares of Argo Group or any of our non-U.S. subsidiaries.

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Due to the attribution provisions of the Internal Revenue Code regarding determination of beneficial ownership, there is a risk that the IRS could assert that Argo Group or one or more of our non-U.S. subsidiaries are CFCs and that U.S. holders of our shares who own 10% or more of the value of our shares should be treated as owning 10% or more of the total voting power of Argo Group and/or our non-U.S. subsidiaries notwithstanding the reduction of voting power discussed above.
If one or more of our non-U.S. subsidiaries is determined to have related person insurance income (“RPII”), you may be subject to U.S. taxation on your pro rata share of such income.
If the RPII of any of our non-U.S. insurance subsidiaries were to equal or exceed 20% of such company’s gross insurance income in any taxable year and direct or indirect insureds (and persons related to such insureds) own, directly or indirectly through entities, 20% or more of our voting power or value, then a U.S. person who owns our shares (directly or indirectly through non-U.S. entities) on the last day of the taxable year would be required to include in its income for U.S. federal income tax purposes such person’s pro rata share of such non-U.S. insurance subsidiary’s RPII for the entire taxable year, determined as if such RPII were distributed proportionately only to U.S. persons at that date regardless of whether such income is distributed. In addition, any RPII that is includible in the income of a U.S. tax-exempt organization may be treated as unrelated business taxable income. The amount of RPII earned by the non-U.S. insurance subsidiaries (generally, premium and related investment income from the direct or indirect insurance or reinsurance of any direct or indirect U.S. holder of common shares or any person related to such holder) will depend on a number of factors, including the identity of persons directly or indirectly insured or reinsured by the non-U.S. insurance subsidiaries. We believe that the gross RPII of each non-U.S. insurance subsidiary did not in prior years of operation and is not expected in the foreseeable future to equal or exceed 20% of such subsidiary’s gross insurance income. Additionally, we do not expect the direct or indirect insureds of our non-U.S. insurance subsidiaries (and persons related to such insureds) to directly or indirectly own 20% or more of either the voting power or value of our shares. No assurance can be given that this will be the case because some of the factors that determine the existence or extent of RPII may be beyond our knowledge and/or control.
The RPII rules provide that if a U.S. person disposes of shares in a non-U.S. insurance corporation in which U.S. persons own 25% or more of the shares (even if the amount of RPII is less than 20% of the corporation’s gross insurance income and the ownership of its shares by direct or indirect insureds and related persons is less than the 20% threshold), any gain from the disposition will generally be treated as ordinary income to the extent of the U.S. person’s share of the corporation’s undistributed earnings and profits that were accumulated during the period that the U.S. person owned the shares (whether or not such earnings and profits are attributable to RPII). In addition, such U.S. person will be required to comply with certain reporting requirements, regardless of the amount of shares owned by the U.S. person. These RPII rules should not apply to dispositions of our shares because we will not ourselves be directly engaged in the insurance business. The RPII provisions, however, have never been interpreted by the courts or the U.S. Treasury Department in final regulations, and regulations interpreting the RPII provisions of the Internal Revenue Code exist only in proposed form. It is not certain whether these regulations will be adopted in their proposed form or what changes or clarifications might ultimately be made thereto or whether any such changes, as well as any interpretation or application of RPII by the IRS, the courts or otherwise, might have retroactive effect. The U.S. Treasury Department has authority to impose, among other things, additional reporting requirements with respect to RPII. Accordingly, the meaning of the RPII provisions and application of those provisions to us and our non-U.S. subsidiaries are uncertain.
U.S. tax-exempt organizations that own our shares may recognize unrelated business taxable income.
A U.S. tax-exempt organization may recognize unrelated business taxable income if a portion of our insurance income is allocated to the organization. In general, insurance income will be allocated to a U.S. tax-exempt organization if either we are a CFC and the tax-exempt shareholder is a 10% U.S. Shareholder or there is RPII and certain exceptions do not apply. Although we do not believe that any U.S. persons should be allocated such insurance income, we cannot be certain that this will this will not occur. U.S. tax-exempt investors should consult their tax advisors as to the U.S. tax consequences of any allocation of our insurance income.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease office space in Bermuda, where our principal executive offices are located. Argo Group U.S., Inc. leases office space in San Antonio, Texas, for its U.S. headquarters and certain operational and support functions. We and our subsidiaries also lease office space in the United States, United Kingdom, Italy, Belgium, Brazil, the United Arab Emirates, France, Switzerland, Malta, Singapore and various geographic locations throughout the world. The properties are leased on terms and for durations that are reflective of commercial standards in the communities where these properties are located. We believe the facilities we occupy are adequate for the purposes in which they are currently used and are well maintained.

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Item 3. Legal Proceedings
We and our subsidiaries are parties to legal actions from time to time, generally arising incidental to our and their business. While any litigation or arbitration proceedings include an element of uncertainty, based on the opinion of legal counsel, management believes that the resolution of these matters will not materially affect our financial condition or results of operations.

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Item 4. Mine Safety Disclosure
Not applicable.
Executive Officers of the Registrant
Our executive officers as of February 25, 2019, along with each such person's age, present title and certain biographical information, is included below. Our executive officers have been appointed by and serve at the pleasure of our board of directors.
Mark E. Watson III (54) has been an investor in the Company since 1998. He became a director in 1999 and has been President and Chief Executive Officer of the Company since January 2000. He has been a principal of Aquila Capital Partners, a San Antonio, Texas-based investment firm since 1998. From 1992 to 1997 he served as a director and Executive Vice President, General Counsel and Secretary of Titan Holdings, Inc., a publicly traded property and casualty insurance holding company. Prior to that, Mr. Watson was an attorney with the New York based law firm Kroll & Tract from 1989 to 1992 where he represented international insurance and reinsurance companies. Mr. Watson is currently a member of the board of directors of the U.S. Chamber of Commerce, a member of the board of governors of the Property Casualty Insurers Association of America and a member of the board of directors of the Association of Bermuda Insurers & Reinsurers. Mr. Watson previously served as a member of the board of directors of Houston International Insurance Group, Ltd. from December 2010 to July 2014 and as chairman of its Audit Committee from November 2011 to May 2013. Due to his investment knowledge and experience in the industry, having previously held several executive positions at Titan Holdings, Inc., Mr. Watson brings to the Board of Directors a wealth of experience in the specialty property and casualty insurance sector and insight into the Company’s investment strategies. In his role as President and Chief Executive Officer of the Company, Mr. Watson also brings to the Board of Directors critical insight into the Company’s operating environment and growth strategy.
Jay S. Bullock (54) has been Chief Financial Officer of Argo Group since May 2008. He joined Argo Group from Bear Stearns & Co. Inc. where he was a Senior Managing Director and Head of Bear Stearns' Insurance Investment Banking Group. While at Bear Stearns, Mr. Bullock focused on the insurance sector. In this role, he advised on company acquisitions, mergers and sales as well as all forms of public and private financings and restructurings. During this period, he was also an advisor to Argo Group on a number of transactions. Prior to joining Bear Stearns in 2000, Mr. Bullock was a Managing Director at First Union Securities. He is an honors graduate of Southern Methodist University and received his MBA from The McColl School of Business, Queen's College, Charlotte, North Carolina. Mr. Bullock also holds the designation of Certified Public Accountant (CPA).
Matthew J. Harris (49) became Head of International Operations of Argo Group effective January 1, 2019. Prior to then, Mr. Harris was Head of Europe, Middle East and Asia of Argo Group since July 2017 and became Head of International Operations effective January 1, 2019. Mr. Harris has more than 25 years of insurance experience with expertise in multiple operational disciplines. Mr. Harris has successfully undertaken senior management assignments across multiple distribution channels and product segments. Prior to joining the Company, Mr. Harris spent nearly ten years at American International Group where he led South East Asia Country Operations and served as chief executive officer of Malaysia Insurance and chief executive officer of Chartis New Zealand (formerly American International Group New Zealand).
Jose A. Hernandez (53) became Chair of International Operations of Argo Group effective January 1, 2019. Prior to then, Mr. Hernandez was Head of International of Argo Group since October 2016. Prior to joining the Company, Mr. Hernandez most recently served as president and chief executive officer of American International Group’s Asia Pacific region. Mr. Hernandez spent more than 20 years with American International Group in a number of senior leadership roles in both the consumer and commercial segments. He has expertise in field operations, distribution, underwriting, claims, strategic planning and management. Mr. Hernandez has a bachelor of science degree in Marketing and Management from Bentley University and a master in business administration degree with a concentration in insurance from the College of Insurance in New York.
Kevin J. Rehnberg (55) became President of the Americas and Chief Administrative Officer of Argo Group effective January 1, 2019. Prior to then, Mr. Rehnberg was President of Argo Group’s U.S. Operations since March 2013. Prior to joining the Company, Mr. Rehnberg served as executive vice president for specialty lines at OneBeacon Insurance where he oversaw specialty business. Mr. Rehnberg began his career at Chubb in 1986 and he held a number of roles with increasing responsibility at Chubb Atlantic, Liberty, St. Paul and St. Paul Travelers through 2005. More recently, he served as CEO of Consultants in Laboratory Medicine of Greater Toledo, Inc. Mr. Rehnberg has a bachelor’s degree in History from Princeton University.
Axel Schmidt (62) has been Chief Underwriting Officer of Argo Group since August 2014. He came to Argo Group from Aviva where he served as Chief Underwriting Officer for the company’s U.K./Ireland business across personal, commercial and corporate/specialty lines and also as Aviva’s global practice leader for underwriting, products, pricing and claims. Prior to joining Aviva, Mr. Schmidt spent 20 years at Zurich in their international business where he held a number of senior underwriting and management positions including Deputy Chief Executive Officer/CUO for their corporate business in Europe/U.K. and Underwriting Director for their global corporate

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business. He also served as a member of Zurich’s Group Underwriting and Group Reinsurance Board of Directors. Prior to joining Zurich, Mr. Schmidt spent 2 years at Gerling Global Re as an underwriter. Mr. Schmidt graduated from Westphalian Wilhelms University in Munster, Germany with a degree in Law Studies. He also earned a Juris Doctorate from the State Supreme Court in Dusseldorf, Germany.

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PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock trades on the NYSE under the symbol “ARGO”.
 
February 21, 2019, the closing price of our common stock was $69.71.
Holders of Common Stock
The number of holders of record of our common stock as of February 21, 2019 was 1,318.
Dividends
On February 20, 2019, our Board of Directors declared a quarterly cash dividend in the amount of $0.31 on each share of common stock outstanding. The dividend will be paid on March 15, 2019 to our shareholders of record on March 1, 2019.
On February 20, 2018, our Board of Directors declared a 15% stock dividend, payable on March 21, 2018, to shareholders of record at the close of business on March 7, 2018. For the years ended December 31, 2018 and 2017, we paid cash dividends to our shareholders totaling $37.5 million and $33.2 million, respectively.
Our dividend policy is determined by the Board of Directors and depends, among other factors, upon our earnings, operations, financial condition, capital requirements and general business outlook at the time the policy is considered.
We currently expect to continue paying comparable cash dividends to shareholders. The declaration and payment of future dividends to our shareholders will be at the discretion of our Board of Directors and will depend upon the factors noted above.
Sale of Unregistered Securities
During the year ended December 31, 2018, we did not sell or issue any unregistered securities.
Issuer Purchases of Equity Securities
On May 3, 2016, our Board of Directors authorized the repurchase of up to $150.0 million of our common shares (“2016 Repurchase Authorization”). The 2016 Repurchase Authorization supersedes all the previous repurchase authorizations.
For the year ended December 31, 2018, we repurchased a total of 530,882 shares of our common stock for a total cost of $31.7 million. Since the inception of all the repurchase authorizations through December 31, 2018, we have repurchased 11,315,889 shares of our common stock at an average price of $40.20 per share for a total cost of $455.1 million. These shares are being held as treasury shares in accordance with the provisions of the Bermuda Companies Act 1981. As of December 31, 2018, availability under the 2016 Repurchase Authorization for future repurchases of our common shares was $53.3 million.
The following table provides information with respect to shares of our common stock that were repurchased or surrendered during the three months ended December 31, 2018:
Period
 
Total
Number
of Shares
Purchased (a)
 
Average
Price Paid
per Share (b)
 
Total
Number of
Shares
Purchased
as Part of
Publically
Announced
Plan
or Program
(c)
 
Approximate
Dollar
Value of
Shares
That May
Yet Be
Purchased
Under the
Plan or
Program (d)
October 1 through October 31, 2018
 
32,239

 
$
59.92

 
29,893

 
$
53,281,805

November 1 through November 30, 2018
 
3,953

 
$
66.51

 

 
$
53,281,805

December 1 through December 31, 2018
 
3,080

 
$
67.28

 

 
$
53,281,805

Total
 
39,272

 
 
 
29,893

 
 

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Employees are allowed to surrender shares to settle the tax liability incurred upon the vesting or exercise of shares under the various employee equity compensation plans. For the three months ended December 31, 2018, we received 9,379 shares of our common stock, with an average price paid per share of $65.73, that were surrendered by employees in payment for the minimum required withholding taxes. In the above table, these shares are included in columns (a) and (b), but excluded from columns (c) and (d). These shares do not reduce the number of shares that may yet be purchased under the repurchase plan.
For the year ended December 31, 2018, we received 211,562 shares of our common stock, with an average price paid per share of $60.09, that were surrendered by employees in payment for the minimum required withholding taxes due to the vesting/exercise of equity compensation awards.
Securities Authorized for Issuance under Equity Compensation Plans
Refer to “Equity Based Compensation Plans” contained in Part III, Item 12 below.
Performance Graph
The following performance graph compares the performance of our common stock during the five-year period from December 31, 2013 through December 31, 2018 with the performance of the NYSE Composite Index and the SNL Property & Casualty Insurance Index. The graph plots the changes in value of an initial $100 investment over the indicated time periods, assuming all dividends are reinvested. The stock price performance shown on the following graph is not intended to predict or be indicative of future price performance.
396875022_chart-5c971db830355942a32.jpg

 
 
For the Years Ended December 31,
Index
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
Argo Group International Holdings, Ltd.
 
$
100.00

 
$
120.95

 
$
145.66

 
$
179.21

 
$
170.56

 
$
217.76

NYSE Composite Index
 
$
100.00

 
$
106.75

 
$
102.38

 
$
114.61

 
$
136.07

 
$
123.89

SNL Property & Casualty Insurance Index
 
$
100.00

 
$
114.85

 
$
118.80

 
$
140.21

 
$
160.30

 
$
154.12


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Table of Contents

Item 6. Selected Financial Data
The following selected financial data is derived from our consolidated financial statements. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included under Item 7 and the consolidated financial statements and notes thereto, included in Item 8, “Financial Statements and Supplementary Data.”
 
 
For the Years Ended December 31,
(in millions, except per share amounts)
 
2018
 
2017
 
2016
 
2015
 
2014
Statement of Operations Data
 
 
 
 
 
 
 
 
 
 
Gross written premiums
 
$
2,955.2

 
$
2,697.2

 
$
2,164.8

 
$
2,012.1

 
$
1,905.4

Earned premiums
 
1,731.7

 
1,572.3

 
1,410.8

 
1,371.9

 
1,338.1

Net investment income
 
133.1

 
140.0

 
115.1

 
88.6

 
106.1

Total revenue
 
1,801.8

 
1,774.1

 
1,576.5

 
1,506.8

 
1,539.4

Net income
 
63.6

 
50.3

 
146.7

 
163.2

 
183.2

Net income per diluted common share (1)
 
1.83

 
1.42

 
4.13

 
4.52

 
4.96

Cash dividends declared per common share (1)
 
1.08

 
0.94

 
0.75

 
0.63

 
0.50

Balance Sheet Data
 
 
 
 
 
 
 
 
 
 
Invested assets
 
$
4,787.0

 
$
4,742.9

 
$
4,320.3

 
$
4,108.4

 
$
4,096.9

Total assets
 
9,558.2

 
8,764.0

 
7,205.0

 
6,625.6

 
6,351.6

Other indebtedness
 
183.4

 
184.5

 
55.4

 
55.2

 
62.0

Junior subordinated debentures
 
257.0

 
256.6

 
172.7

 
172.7

 
172.7

Senior unsecured fixed rate notes
 
139.8

 
139.6

 
139.5

 
139.3

 
139.1

Shareholders' equity
 
1,746.7

 
1,819.7

 
1,792.7

 
1,668.1

 
1,646.7

Other Select Data
 
 
 
 
 
 
 
 
 
 
Cash provided by (used in) operating activities
 
$
301.3

 
$
165.0

 
$
182.0

 
$
283.2

 
$
130.6

Book value per share (1)
 
51.43

 
53.46

 
51.94

 
47.23

 
46.03

Combined ratio
 
97.9
%
 
107.2
%
 
96.2
%
 
95.0
%
 
96.0
%
(1) 
Per share amounts adjusted for the effects of the 15% stock dividend declared in February 2018 and for the 10% stock dividends declared in May 2016 and February 2015, respectively. Book value per share is calculated by taking total shareholders’ equity divided by total issued shares less treasury shares.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and related notes beginning on page F-1. This discussion contains forward-looking statements that involve risks and uncertainties. Our future results may differ materially from those disclosed herein as a result of significant risks and uncertainties and various factors described in this report.
Consolidated Results of Operations
For the year ended December 31, 2018, we reported net income of $63.6 million, or $1.83 per fully diluted share. For the year ended December 31, 2017, we reported net income of $50.3 million, or $1.42 per fully diluted share. For the year ended December 31, 2016 we reported net income of $146.7 million, or $4.13 per fully diluted share.
The following is a comparison of selected data from our results of operations:
 
For the Years Ended December 31,
(in millions)
2018
 
2017
 
2016
Gross written premiums
$
2,955.2

 
$
2,697.2

 
$
2,164.8

Earned premiums
$
1,731.7

 
$
1,572.3

 
$
1,410.8

Net investment income
133.1

 
140.0

 
115.1

Fee and other income
9.0

 
22.5

 
24.5

Net realized investment gains (losses):
 
 
 
 
 
Net realized investment gains
33.1

 
39.3

 
26.1

Change in fair value of equity securities
(105.1
)
 

 

Net realized investment (losses) gains
(72.0
)
 
39.3

 
26.1

Total revenue
$
1,801.8

 
$
1,774.1

 
$
1,576.5

Income before income taxes
$
67.7

 
$
39.9

 
$
181.9

Income tax provision (benefit)
4.1

 
(10.4
)
 
35.2

Net income
$
63.6

 
$
50.3

 
$
146.7

Loss ratio
60.1
%
 
66.8
%
 
57.4
%
Expense ratio
37.8
%
 
40.4
%
 
38.8
%
Combined ratio
97.9
%

107.2
%

96.2
%

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In presenting our results in the following discussion and analysis of our results of operations, we have included certain non-generally accepted accounting principles ("non-GAAP") financial measures within the meaning of Regulation G as promulgated by the SEC. We believe that these non-GAAP measures, specifically the current accident year non-catastrophe loss, expense and combined ratios, which may be defined differently by other companies, better explain our results of operations in a manner that allows for a more complete understanding of the underlying trends in our business. However, these measures should not be viewed as a substitute for those determined in accordance with United States generally accepted accounting principles ("GAAP"). Reconciliations of these financial measures to their most directly comparable GAAP measures are included in the table below.
 
 
For the Years Ended December 31,
 
 
2018
 
2017
 
2016
(in millions)
 
Amount
 
Ratio (1)
 
Amount
 
Ratio (1)
 
Amount
 
Ratio (1)
Earned premiums, as reported
 
$
1,731.7

 
 
 
$
1,572.3

 
 
 
$
1,410.8

 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
Reinstatement and other catastrophe-related premium adjustments - (outward)/inward, net
 
(9.0
)
 
 
 
(17.9
)
 
 
 
2.2

 
 
Earned premiums, net of catastrophe-related adjustments
 
$
1,740.7

 
 
 
$
1,590.2

 
 
 
$
1,408.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses, as reported
 
$
1,040.8

 
60.1
 %
 
$
1,050.2

 
66.8
 %
 
$
810.1

 
57.4
 %
Less:
 
 
 
 
 
 
 
 
 
 
 
 
Favorable prior accident year loss development
 
(18.0
)
 
(1.0
)%
 
(8.2
)
 
(0.5
)%
 
(33.3
)
 
(2.4
)%
Catastrophe losses (2)
 
52.9

 
3.3
 %
 
127.2

 
8.7
 %
 
63.9

 
4.4
 %
Current accident year non-catastrophe losses
 
$
1,005.9

 
57.8
 %
 
$
931.2

 
58.6
 %
 
$
779.5

 
55.4
 %
Current accident year non-catastrophe expense ratio
 
 
 
37.6
 %
 
 
 
40.0
 %
 
 
 
38.8
 %
Current accident year non-catastrophe combined ratio
 
 
 
95.4
 %
 
 
 
98.6
 %
 
 
 
94.2
 %
(1) For purposes of calculating the percentage points impact on the loss, expense and combined ratios, earned premiums were adjusted to exclude outward reinstatement and other catastrophe-related premium adjustments of $9.0 million and $17.9 million for the years ended December 31, 2018 and 2017, respectively, and $2.2 million inward reinstatement and other catastrophe-related premium adjustments for the year ended December 31, 2016.
(2) Catastrophe losses' percentage point impact are calculated as the difference between the reported combined ratio and the combined ratio excluding incurred catastrophe losses and associated reinstatement and other catastrophe-related premium adjustments.
Impact of recently adopted accounting standard
Effective January 1, 2018, the Company adopted ASU No. 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Liabilities, using a cumulative effect adjustment. This adjustment transferred the unrealized gains and losses as of December 31, 2017, net of tax, on equity securities from accumulated other comprehensive income to retained earnings, resulting in no overall impact to shareholders' equity.
In accordance with this accounting standard, for the year ended December 31, 2018, we recognized the change in the fair value of our equity securities as a pre-tax loss of $105.1 million. This amount is included as a component of net realized investment losses in our Consolidated Statements of Income. Amounts for the years ended December 31, 2017 and 2016 are not presented as a component of net income, as ASU 2016-01 was required to be adopted on a prospective basis.

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Gross Written and Earned Premiums
Consolidated gross written and earned premiums by our four primary insurance lines were as follows: 
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
(in millions)
Gross Written
 
Net Earned
 
Gross Written
 
Net Earned
 
Gross Written
 
Net Earned
Property
$
748.9

 
$
337.1

 
$
689.3

 
$
337.7

 
$
561.7

 
$
330.5

Liability
1,236.3

 
807.5

 
1,109.4

 
698.8

 
940.6

 
661.9

Professional
425.0

 
234.9

 
346.2

 
212.2

 
299.5

 
182.0

Specialty
545.0

 
352.2

 
552.3

 
323.6

 
363.0

 
236.4

Total
$
2,955.2


$
1,731.7


$
2,697.2


$
1,572.3


$
2,164.8


$
1,410.8

Gross written and earned premiums increased for the year ended December 31, 2018 as compared to the same period ended 2017, driven by the growth in all major lines of our U.S. Operations, led by our Liability and Professional lines. International Operations experienced increases in both gross written and earned premiums during 2018 as compared to 2017, primarily due to growth in our Property, Liability and Professional lines, as well as the timing of the Ariel Re acquisition. Ariel Re has a significant property contract that is subject to renewal in January of each year. The Ariel Re transaction closed in February 2017; as such the January 2017 gross written premiums for Ariel Re is not included while the 2018 renewal is included in our gross written premiums.
As part of the full integration of the reinsurance business of Ariel Re, beginning in 2018 we changed the capital structure supporting that business by introducing certain third party trade capital to participate in the exposures we underwrite. This trade capital receives a corresponding proportion of the gross written premiums. As such, this structure has the effect of reducing the gross written premiums reported in our financial statements. In exchange, we receive certain remuneration for generating this business and for the underlying underwriting performance. There was no such structure for our Ariel Re business in 2017.
During 2018, all product lines have experienced increased competition and pressure on rates due to market conditions. However, both U.S. Operations and International Operations saw overall rate increases for year ended December 31, 2018. Consolidated earned premiums increased for the year ended December 31, 2018 as compared to the same period in 2017 due to increased gross and net written premiums during 2018.
The increase in consolidated gross written premiums for the year ended December 31, 2017 as compared to the same period in 2016 was attributable to growth across all product lines as we continued to focus on introducing new products and increasing renewal retention. Additionally, Ariel Re contributed gross written premiums of $298.1 million for the year ended December 31, 2017. During 2017, all product lines experienced increased competition and pressure on rates due to market conditions. Consolidated earned premiums increased for the year ended December 31, 2017 as compared to the same period in 2016 due to the growth in gross written premiums. The increase in consolidated earned premiums for the year ended December 31, 2017 includes Ariel Re earned premiums of $123.3 million. Partially offsetting these increases was the reduction in our participation percentage for our Syndicate 1200 operations, to 46.0% in 2017 as compared to 53.5% in 2016. Additionally, during the last six months of 2017, we recorded net outward reinstatement and other catastrophe-related premium adjustments associated with the third quarter 2017 catastrophe events which reduced net earned premiums by $17.9 million. We also purchased additional reinsurance contracts in connection with risk management activities following the acquisition of Ariel Re which reduced net earned premiums by $20.8 million, all within our Property lines.
Our gross written and earned premiums are further discussed by reporting segment and major lines of business in the subsequent "Segment Results" section of this document.
Net Investment Income
The decrease in consolidated net investment income for the year ended December 31, 2018 as compared to the same period in 2017 was primarily due to a $29.7 million decrease in the net investment income of our alternative investment portfolio, partially offset by a $22.8 million increase in the net investment income of our core portfolio. The decline in the alternative investment portfolio was due to the volatility experienced in the securities markets primarily during the fourth quarter of 2018, as well as the impact of a $12.2 million pre-tax net investment gain recognized in 2017 related to a sale process initiated by an equity investee. The increase in net investment income from our core portfolio was primarily due to higher asset balances and increased investment yields.

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The increase in consolidated net investment income for the year ended December 31, 2017 as compared to the same period in 2016 was primarily attributable to a $25.6 million increase in the net investment income of our alternative investment portfolio and an $8.2 million increase in income from our fixed maturities portfolio, partially offset by increased investment related expenses. Included in net investment income was a $12.2 million pre-tax net investment gain relating to a sale process initiated by an equity investee during the year ended December 31, 2017.
Total invested assets at December 31, 2018 were $4,653.6 million, net of $133.4 million of invested assets attributable to our Syndicate 1200 and 1910 trade capital providers. Total invested assets at December 31, 2017 were $4,612.1 million, net of $130.8 million of invested assets attributable to Syndicate 1200’s trade capital providers. Total invested assets at December 31, 2016 were $4,188.4 million, net of $131.9 million of invested assets attributable to Syndicate 1200’s trade capital providers.
Net Realized Investment Gains/Losses
Consolidated net realized investment gains for the year ended December 31, 2018 included a $105.1 million decrease in the fair value of equity securities. The remaining $33.1 million net realized investment gain consisted of $38.2 million in realized gains primarily from the sale of equity securities and $2.5 million of foreign currency exchange gains, including $2.7 million on our forward currency forward contracts. Additionally, for the year ended December 31, 2018, we recognized $7.6 million in other-than-temporary impairment losses within our fixed maturity and other invested asset portfolios.
Consolidated net realized investment gains for the year ended December 31, 2017 consisted of $60.1 million in realized gains primarily from the sale of fixed maturity and equity securities. Partially offsetting these realized gains was $17.6 million of realized foreign currency exchange losses, including $8.6 million on our foreign currency forward contracts and $9.0 million on our fixed maturity and equity securities portfolios, as well as $0.7 million of losses from other invested assets, primarily overseas deposits. Additionally, for the year ended December 31, 2017, we recognized a $2.5 million other-than-temporary impairment loss within our equity and fixed maturity portfolios.
Consolidated net realized investment gains for the year ended December 31, 2016 consisted of $62.0 million in realized gains primarily from the sale of equity and fixed maturity securities. Partially offsetting these realized gains was $25.7 million of realized foreign currency exchange losses, primarily from our fixed maturity portfolio. Additionally, for the year ended December 31, 2016, we recognized a $10.2 million other-than-temporary impairment loss within our equity and fixed maturity portfolios.
Loss and Loss Adjustment Expense
Consolidated losses and loss adjustment expenses were $1,040.8 million, $1,050.2 million and $810.1 million for the years ended December 31, 2018, 2017 and 2016, respectively. The consolidated loss ratio for the year ended December 31, 2018 was 60.1%, compared to 66.8% for the same period in 2017. This 6.7 percentage point decrease in the loss ratio was primarily due to a 5.4 percentage point favorable impact related to lower catastrophe losses. The current accident year non-catastrophe loss ratio improved 0.8 percentage points during the year ended December 31, 2018, compared to the same period in 2017. In connection with the acquisition and integration of Ariel Re, we made a number of one-time catastrophe and risk management reinsurance purchases in 2017. These 2017 purchases reduced earned premiums by $20.8 million, resulting in a 0.7 percentage point increase in the 2017 loss ratio. Partially offsetting this improvement to the current accident year non-catastrophe loss ratio were a number of discrete marine and energy losses within our International Operations segment, concentrated in the fourth quarter of 2018. We also experienced a 0.5 percentage point favorable impact from the increase in net favorable prior-year reserve development for the year ended December 31, 2018, compared to the same period in 2017.
Included in losses and loss adjustment expense for the year ended December 31, 2018 was $52.9 million in catastrophe losses, primarily attributable to Hurricanes Florence and Michael, the Woolsey and Camp California wildfires, and other storms. Losses and loss adjustment expenses also included $18.0 million of net favorable loss reserve development on prior accident years, concentrated in the liability and specialty lines.
Included in losses and loss adjustment expense for the year ended December 31, 2017 were $127.2 million in catastrophe losses resulting from Hurricanes Harvey, Irma and Maria, the California wildfires, other storm losses primarily in the United States and the Mexican earthquakes. Partially offsetting these catastrophe losses was $8.2 million of net favorable development on prior accident year loss reserves, which is presented in the table below. We also experienced higher than anticipated non-catastrophe current accident year property losses in 2017.
Included in losses and loss adjustment expenses for the year ended December 31, 2016 were $63.9 million in catastrophe losses resulting from storm activity in the United States, including Hurricane Matthew and the Louisiana floods, the Alberta wildfires and the Taiwan and New Zealand earthquakes. Partially offsetting these current accident year losses was $33.3 million of net favorable development on

49

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prior accident year loss reserves, primarily attributable to favorable development in our commercial automobile, property reinsurance, surety and commercial multiple peril lines, partially offset by unfavorable development in our general liability line.
The following table summarizes the above referenced loss reserve development as respects prior year loss reserves by line of business for the year ended December 31, 2018:
(in millions)
 Net Reserves 2017
 
Net Reserve
Development
(Favorable)/
Unfavorable
 
 Percent of 2017 Net Reserves
General liability
$
1,142.1

 
$
(14.4
)
 
(1.3
)%
Workers compensation
308.7

 
1.0

 
0.3
 %
Syndicate Liability
196.4

 
10.9

 
5.5
 %
Commercial multi-peril
147.5

 
4.9

 
3.3
 %
Syndicate property
104.2

 
(6.7
)
 
(6.4
)%
Commercial auto liability
99.9

 
(4.6
)
 
(4.6
)%
Special property
80.9

 
(0.7
)
 
(0.9
)%
Reinsurance - nonproportional assumed property
80.7

 
(16.8
)
 
(20.8
)%
Syndicate specialty
44.2

 
3.5

 
7.9
 %
Fidelity/Surety
44.1

 
(10.9
)
 
(24.7
)%
All other lines
239.3

 
15.8

 
6.6
 %
Total
$
2,488.0

 
$
(18.0
)
 
(0.7
)%
In determining appropriate reserve levels for the year ended December 31, 2018, 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 loss and loss adjustment expenses were $4,654.6 million (including $226.2 million of reserves attributable to our Syndicate 1200 and 1910 trade capital providers), $4,201.0 million (including $226.8 million of reserves attributable to Syndicate 1200’s trade capital providers) and $3,350.8 million (including $156.1 million of reserves attributable to Syndicate 1200’s trade capital providers) as of December 31, 2018, 2017 and 2016, respectively. 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 Insurance Expenses
Consolidated underwriting, acquisition and insurance expenses were $654.7 million, $635.4 million and $547.0 million for the years ended December 31, 2018, 2017 and 2016, respectively. The consolidated expense ratios were 37.8%, 40.4% and 38.8% for the years ended December 31, 2018, 2017 and 2016, respectively. The improvement in 2018 compared to 2017 reflects the benefits of scale due to increased net earned premiums, including the favorable year-over-year impact of the aforementioned $20.8 million reduction in net earned premiums in 2017 related to one-time catastrophe and risk management reinsurance purchases, as well as lower operating costs within the Reinsurance business unit of our International Operations due to expenses attributable to third party capital providers. Partially offsetting these lower operating costs were the continued investments in people and technology in strategic growth areas of our business.
The expense ratio for the year ended December 31, 2017 as compared to the same period in 2016 was negatively impacted by the aforementioned one-time catastrophe and risk management reinsurance premium purchases and additional group reinsurance contracts purchased in connection with risk management activities following the acquisition of Ariel Re. These adjustments increased the expense ratio by 1.0 percentage point. The remaining increase in the expense ratio was primarily attributable to increased information technology costs and higher personnel expenses in our strategic growth units.  

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Interest Expense
Consolidated interest expense was $31.6 million, $27.7 million and $19.6 million for the years ended December 31, 2018, 2017 and 2016, respectively. The increase in 2018 was primarily attributable to increases in short-term LIBOR rates throughout the year ended December 31, 2018, as compared to the same period in 2017. Additionally, during 2018 we incurred a full twelve months of interest expense on the debt acquired as part of the February 6, 2017 Ariel Re acquisition and the $125.0 million term loan entered into during the first quarter of 2017 to help fund that transaction. Comparatively, these same debt instruments accrued interest at a lower rate and for less than the full twelve months during the year ended December 31, 2017.
Included in consolidated interest expense for the year ended December 31, 2017 was $4.2 million from the operations of Ariel Re. The remaining increase in interest expense as compared to the same period in 2016 was primarily attributable to interest expense on the $125.0 million term loan entered into to fund a portion of the acquisition price of Ariel Re and to a lesser extent, an increase in short-term LIBOR rates.
Foreign Currency Exchange Gains/Losses
Consolidated foreign currency exchange gains were $0.1 million for the year ended December 31, 2018 as compared to losses of $6.3 million and gains of $4.5 million for the years ended December 31, 2017 and 2016, respectively. The changes in the foreign currency exchange gains/losses were due to fluctuations of the U.S. Dollar, on a weighted average basis, against the currencies in which we transact our business.
For the year ended December 31, 2018, the small foreign currency exchange gain was driven by the U.S. Dollar strengthening against the British Pound. For the year ended December 31, 2017, the foreign currency exchange losses were driven by the U.S. Dollar weakening against the British Pound, the Euro, the Canadian Dollar and the Australian Dollar. For the year ended December 31, 2016, the foreign currency exchange gain was primarily due to the U.S. Dollar strengthening against the British Pound and the Euro.
Income Tax Provision
The consolidated provision for income taxes was $4.1 million for the year ended December 31, 2018, compared to an income tax benefit of $10.4 million for the year ended December 31, 2017, and an income tax provision of $35.2 million for the year ended December 31, 2016. 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 Belgium, Brazil, Ireland, Italy, Malta, Switzerland, United Kingdom and United States operations. The consolidated effective tax rates were 6.1%, -26.1% and 19.4% for the years ended December 31, 2018, 2017 and 2016, respectively.
The increase in the effective tax rate for the year ended December 31, 2018 as compared to the same period in 2017 was primarily related to the change in concentration of jurisdictional mix of taxable income in 2018 compared to 2017. Additionally, the 2018 effective tax rate includes a favorable impact related to the new reporting requirements for the change in the fair value of our equity securities, which lowered our pre-tax income by $105.1 million for the year ended December 31, 2018. As discussed above, the change in the fair value of equity securities for prior years is not presented as a component of net income. The 2017 effective tax rate benefited from the impact of the U.S. tax reform legislation enacted during that period, as further discussed below.
The decrease in the effective tax rate for the year ended December 31, 2017 as compared to the same period in 2016 was primarily related to the revaluation of our net deferred tax liability due to the reduction of the U.S. corporate statutory income tax rate from 35% to 21% (primarily related to the unrealized gains on our investment portfolio) benefiting our 2017 tax provision by $20.2 million. This benefit, recognized in the fourth quarter of 2017, primarily offset the year-to-date U.S. tax expense. The remaining decrease in our effective tax rate was primarily attributable to a higher pretax loss from our United Kingdom operations in 2017, with an associated income tax benefit of $10.3 million for the year ended December 31, 2017.
Segment Results
We are primarily engaged in writing property and casualty insurance and reinsurance. We have two ongoing reporting segments: U.S. Operations and International Operations. Additionally, we have a Run-off Lines segment for products that we no longer underwrite.
We consider many factors, including the nature of each segment’s insurance and reinsurance products, production sources, distribution strategies and regulatory environment, in determining how to aggregate reporting segments.

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Our reportable segments include four primary insurance and reinsurance services and offerings as follows:
Property includes both property insurance and reinsurance products. Insurance products cover commercial properties primarily in North America with some international covers. Reinsurance covers underlying exposures that are located throughout the world, including the United States. These offerings include coverages for man-made and natural disasters.
Liability includes a broad range of primary and excess casualty products for risks on both an admitted and non-admitted basis in the United States. Internationally, Argo underwrites worldwide casualty risks primarily exposed in the United Kingdom, Canada, and Australia.
Professional includes various professional lines products including errors & omissions, management liability (including directors and officers) and cyber liability coverages.
Specialty includes niche insurance coverages including marine & energy, accident & health and surety product offerings.
In evaluating the operating performance of our segments, we focus on core underwriting and investing results before consideration of realized gains or losses from the sales of investments. Intersegment transactions are allocated to the segment that initiated the transaction. Realized investment gains and losses are reported as a component of the Corporate and Other segment, as decisions regarding the acquisition and disposal of securities reside with the corporate investment function and are not under the control of the individual business segments. Although this measure of profit (loss) does not replace net income (loss) computed in accordance with GAAP as a measure of profitability, management uses this measure of profit (loss) to focus our reporting segments on generating operating income.
Since we generally manage and monitor the investment portfolio on an aggregate basis, the overall performance of the investment portfolio, and related net investment income, is discussed above on a combined basis under consolidated net investment income rather than within or by segment.
U.S. Operations
The following table summarizes the results of operations for the U.S. Operations segment:
 
For the Years Ended December 31,
(in millions)
2018
 
2017
 
2016
Gross written premiums
$
1,692.2

 
$
1,509.8

 
$
1,277.7

Earned premiums
$
1,078.9

 
$
936.6

 
$
849.5

Losses and loss adjustment expenses
628.2

 
528.1

 
467.5

Underwriting, acquisition and insurance expenses
354.8

 
319.1

 
270.5

Underwriting income
95.9


89.4


111.5

Net investment income
82.9

 
87.2

 
71.9

Interest expense
(16.2
)
 
(14.1
)
 
(9.2
)
Fee and other income
1.5

 
16.2

 
19.1

Fee and other expense
(2.7
)
 
(9.3
)
 
(18.9
)
Income before income taxes
$
161.4


$
169.4


$
174.4

Loss ratio
58.2
%
 
56.4
%
 
55.0
%
Expense ratio
32.9
%
 
34.1
%
 
31.9
%
Combined ratio
91.1
%
 
90.5
%
 
86.9
%
Loss reserves at December 31
$
2,498.9

 
$
2,196.1

 
$
2,028.4


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The following table contains a reconciliation of certain non-GAAP financial measures, specifically the current accident year non-catastrophe loss, expense and combined ratios, to their most directly comparable GAAP measures for our U.S. Operations.
 
 
For the Years Ended December 31,
 
 
2018
 
2017
 
2016
(in millions)
 
Amount
 
Ratio (1)
 
Amount
 
Ratio (1)
 
Amount
 
Ratio (1)
Earned premiums
 
$
1,078.9

 
 
 
$
936.6

 
 
 
$
849.5

 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
Reinstatement and other catastrophe-related premium adjustments - outward
 
(7.7
)
 
 
 
(5.1
)
 
 
 

 
 
Earned premiums, net of catastrophe-related adjustments
 
$
1,086.6

 
 
 
$
941.7

 
 
 
$
849.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses, as reported
 
$
628.2

 
58.2
 %
 
$
528.1

 
56.4
 %
 
$
467.5

 
55.0
 %
Less:
 
 
 
 
 
 
 
 
 
 
 
 
Favorable prior accident year loss development
 
(20.8
)
 
(1.9
)%
 
(38.7
)
 
(4.1
)%
 
(35.9
)
 
(4.2
)%
Catastrophe losses (2)
 
15.6

 
1.8
 %
 
16.8

 
2.1
 %
 
14.2

 
1.6
 %
Current accident year non-catastrophe losses
 
$
633.4

 
58.3
 %
 
$
550.0

 
58.4
 %
 
$
489.2

 
57.6
 %
Current accident year non-catastrophe expense ratio
 
 
 
32.7
 %
 
 
 
33.9
 %
 
 
 
31.9
 %
Current accident year non-catastrophe combined ratio
 
 
 
91.0
 %
 
 
 
92.3
 %
 
 
 
89.5
 %
(1) For purposes of calculating the percentage points impact on the loss, expense and combined ratios, earned premiums were adjusted to exclude outward reinstatement and other catastrophe-related premium adjustments of $7.7 million and $5.1 million for the years ended December 31, 2018 and 2017, respectively.
(2) Catastrophe losses' percentage point impact are calculated as the difference between the reported combined ratio and the combined ratio excluding incurred catastrophe losses and associated reinstatement and other catastrophe-related premium adjustments.
Gross Written and Earned Premiums
Gross written and earned premiums by our four primary insurance lines were as follows:
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
(in millions)
Gross Written
 
Net Earned
 
Gross Written
 
Net Earned
 
Gross Written
 
Net Earned
Property
$
252.3

 
$
126.4

 
$
246.7

 
$
113.4

 
$
239.8

 
$
124.9

Liability
1,042.3

 
707.1

 
946.7

 
619.2

 
794.8

 
575.3

Professional
234.8

 
131.6

 
176.5

 
111.3

 
140.4

 
79.3

Specialty
162.8

 
113.8

 
139.9

 
92.7

 
102.7

 
70.0

Total
$
1,692.2


$
1,078.9


$
1,509.8


$
936.6


$
1,277.7


$
849.5

Property
The increase in gross written premiums for the year ended December 31, 2018 compared to the same period in 2017 was due to growth initiatives executed in our property, contract binding, and transportation divisions, partially offset by the termination of a fronted program in 2017. While the same products referenced above contributed to the increase in earned premiums, the margin of increase was diminished by a new reinsurance program intended to transfer more of our property exposure. Another large property program launched in 2017 has a majority of its business placed with policy terms longer than twelve months, which also impacted the growth in earned premium in 2018. Earned premiums were reduced by $7.7 million during the year ended December 31, 2018 due to net outward reinstatement premium adjustments primarily related to Hurricane Michael. Earned premiums in 2017 were reduced by $9.2 million due to various reinsurance premium adjustments, as further discussed below.
The increase in gross written premiums for the year ended December 31, 2017 as compared to the same period in 2016 was due to launching new programs in 2017, partially offset by reductions from the termination of a fronted program in 2017, as well as planned underwriting actions taken to optimize our underwriting results. Additionally, during the last six months of 2017, we recorded net outward reinstatement and other catastrophe-related premium adjustments associated with the third quarter 2017 catastrophe events which reduced net earned premiums by $5.1 million. We also purchased additional reinsurance contracts in connection with risk management activities

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following the acquisition of Ariel Re which reduced net earned premiums by $4.1 million, all within our Property lines. Underwriting actions taken in certain programs to optimize results also account for the reduction in earned premiums during the year ended December 31, 2017 as compared to the same period in 2016.
Liability
The gross written and earned premiums for the year ended December 31, 2018 increased compared to the same period in 2017 due to significant growth in the general casualty lines, as planned. Economic growth in the coal market also continued to drive an increase in workers compensation lines. We experienced growth in environmental and transportation lines, as well as a new fronted program which increased gross written premiums in auto liability. Partially offsetting the growth was a planned reduction in our allied medical business.
The increase in gross written and earned premiums for the year ended December 31, 2017 as compared to the same period in 2016 was primarily due to new programs launched in 2017 and late 2016 that capitalized on targeted growth initiatives in the specialty and general casualty lines. Our workers compensation business grew during the comparative periods, benefiting from the improving U.S. economy and the upturn in the coal market.
Professional
The increase in gross written and earned premiums for the year ended December 31, 2018 as compared to the same period in 2017 was driven by the continued investment in the teams that underwrite and support this line of business, as well as the introduction of new products.
The increase in gross written and earned premiums for the year ended December 31, 2017 as compared to the same period in 2016 was driven by the introduction of new coverage products in all U.S. professional lines and higher production associated with increasing our underwriting staff.
Specialty
The increase in gross written and earned premiums for the year ended December 31, 2018 as compared to the same period in 2017 was primarily due to the continued growth in our surety lines, partially offset by planned reductions in certain programs.
The increase in gross written and earned premiums for the year ended December 31, 2017 as compared to the same period in 2016 was driven by growth from new business in our surety lines and new specialty risk programs that were introduced throughout 2017.
Loss and Loss Adjustment Expenses
The increase in the loss ratio for the year ended December 31, 2018 as compared to the same period in 2017 was primarily due to a decline in net favorable loss reserve development on prior accident years, partially offset by lower catastrophe losses in 2018 as compared to 2017. The increase in the loss ratio for the year ended December 31, 2017 compared to the same period in 2016 was primarily due to increased non-catastrophe current accident year property losses in 2017.
Included in losses and loss adjustment expense for the year ended December 31, 2018 was $15.6 million in catastrophe losses from the Woolsey and Camp California wildfires, Hurricane Florence, and other smaller storms in the United States. Offsetting the catastrophe losses was $20.8 million of net favorable loss reserve development on prior accident years which was primarily concentrated in our general liability and surety lines, partially offset by unfavorable loss reserve development on prior accident years in commercial multi-peril lines.
Included in losses and loss adjustment expense for the year ended December 31, 2017 was $16.8 million in catastrophe losses from Hurricanes Harvey and Irma, other smaller storms and the California wildfires. Offsetting the catastrophe losses was $38.7 million of net favorable loss reserve development on prior accident years which was primarily concentrated in our general liability, workers compensation, surety and commercial automobile lines. We also experienced increased non-catastrophe current accident year property losses in 2017.
Included in losses and loss adjustment expense for the year ended December 31, 2016 was $14.2 million in catastrophe losses from Hurricane Matthew, the Louisiana floods and various storm activity in the United States. Offsetting the catastrophe losses was $35.9 million of net favorable loss reserve development on prior accident years primarily attributable to favorable development in our commercial automobile, workers compensation, surety and commercial multiple peril lines, partially offset by unfavorable development in our general liability lines.

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Underwriting, Acquisition and Insurance Expenses
The decrease in the expense ratio for the year ended December 31, 2018 as compared to the same period in 2017 was primarily attributable to the impact of the 15.2% year-over-year increase in earned premiums combined with lower acquisition costs, primarily offset by continued strategic investments in people and technology, including digital initiatives in support of premium growth.
The increase in the expense ratio for the year ended December 31, 2017 as compared to the same period in 2016 was primarily attributable to higher acquisition expenses due to changes in certain reinsurance agreements and programs that resulted in declines in ceding commissions and fronting fees earned, as well as increased non-acquisition expenses. The increase in non-acquisition expenses was primarily attributable to higher information technology and occupancy costs.
Fee and Other Income/Expense
Fee and other income, and the associated fee and other expense, decreased for the year ended December 31, 2018 as compared to the same period in 2017 primarily due to the result of a transaction that was executed in the third quarter of 2017 to transfer to a third party the distribution rights and operations of certain business managed on behalf of unaffiliated insurance companies. The fee income and expense related to this program were recorded as part of our fee and other income and expense, respectively.
Fee and other income, and the associated fee and other expense, decreased for the year ended December 31, 2017 as compared to the same period in 2016 primarily due to the impact of the aforementioned transaction in the third quarter of 2017.
International Operations
The following table summarizes the results of operations for the International Operations segment:
 
For the Years Ended December 31,
(in millions)
2018
 
2017
 
2016
Gross written premiums
$
1,262.7

 
$
1,187.3

 
$
886.8

Earned premiums
$
652.5

 
$
635.8

 
$
560.9

Losses and loss adjustment expenses
400.3

 
504.8

 
324.0

Underwriting, acquisition and insurance expenses
245.8

 
242.2

 
211.1

Underwriting income (loss)
6.4


(111.2
)

25.8

Net investment income
32.9

 
32.7

 
28.7

Interest expense
(9.3
)
 
(9.7
)
 
(5.3
)
Fee and other income
4.7

 
3.7

 
3.1

Fee and other expense
(1.8
)
 
(2.2
)
 
(0.7
)
Income (loss) before income taxes
$
32.9


$
(86.7
)

$
51.6

Loss ratio
61.3
%
 
79.4
%
 
57.8
%
Expense ratio
37.7
%
 
38.1
%
 
37.6
%
Combined ratio
99.0
%

117.5
%

95.4
%
Loss reserves at December 31
$
1,890.1

 
$
1,723.0

 
$
1,031.5


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The following table contains a reconciliation of certain non-GAAP financial measures, specifically the current accident year non-catastrophe loss, expense and combined ratios, to their most directly comparable GAAP measures for our International Operations.
 
 
For the Years Ended December 31,
 
 
2018
 
2017
 
2016
(in millions)
 
Amount
 
Ratio (1)
 
Amount
 
Ratio (1)
 
Amount
 
Ratio (1)
Earned premiums
 
$
652.5

 
 
 
$
635.8

 
 
 
$
560.9

 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
Reinstatement and other catastrophe-related premium adjustments - (outward)/inward, net
 
(1.3
)
 
 
 
(12.8
)
 
 
 
2.2

 
 
Earned premiums, net of catastrophe-related adjustments
 
$
653.8

 
 
 
$
648.6

 
 
 
$
558.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses, as reported
 
$
400.3

 
61.3
 %
 
$
504.8

 
79.4
%
 
$
324.0

 
57.8
 %
Less:
 
 
 
 
 
 
 
 
 
 
 
 
(Favorable) unfavorable prior accident year loss development
 
(9.5
)
 
(1.5
)%
 
13.2

 
2.0
%
 
(16.0
)
 
(2.9
)%
Catastrophe losses (2)
 
37.3

 
5.8
 %
 
110.4

 
18.6
%
 
49.7

 
8.7
 %
Current accident year non-catastrophe losses
 
$
372.5

 
57.0
 %
 
$
381.2

 
58.8
%
 
$
290.3

 
52.0
 %
Current accident year non-catastrophe expense ratio
 
 
 
37.6
 %
 
 
 
37.3
%
 
 
 
37.8
 %
Current accident year non-catastrophe combined ratio
 
 
 
94.6
 %
 
 
 
96.1
%
 
 
 
89.8
 %
(1) For purposes of calculating the percentage points impact on the loss, expense and combined ratios, earned premiums were adjusted to exclude outward reinstatement and other catastrophe-related premium adjustments of $1.3 million and $12.8 million for the years ended December 31, 2018 and 2017, respectively, and $2.2 million inward reinstatement and other catastrophe-related premium adjustments for the year ended December 31, 2016.
(2) Catastrophe losses' percentage point impact are calculated as the difference between the reported combined ratio and the combined ratio excluding incurred catastrophe losses and associated reinstatement and other catastrophe-related premium adjustments.
Gross Written and Earned Premiums
Gross written and earned premiums by our four primary insurance lines were as follows:
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
(in millions)
Gross Written
 
Net Earned
 
Gross Written
 
Net Earned
 
Gross Written
 
Net Earned
Property
$
496.6

 
$
210.7

 
$
442.6

 
$
224.3

 
$
321.9

 
$
205.6

Liability
193.7

 
100.1

 
162.6

 
79.6

 
145.5

 
86.2

Professional
190.2

 
103.3

 
169.7

 
100.9

 
159.1

 
102.7

Specialty
382.2

 
238.4

 
412.4

 
231.0

 
260.3

 
166.4

Total
$
1,262.7


$
652.5


$
1,187.3


$
635.8


$
886.8


$
560.9

Property
The increase in gross written premiums for the year ended December 31, 2018 as compared to the same period in 2017 was due to growth in our European operations and our Reinsurance business, partially offset by planned premium reductions within Syndicate 1200. Our European operations contributed $68.3 million of gross written premiums in the current period compared to $6.5 million of gross written premiums in the same period in 2017. The significant growth in Europe was driven by new programs and the addition of ArgoGlobal SpA (formerly Ariscom), the Italian business we acquired in early 2018. Growth in gross written premiums in our Reinsurance business was primarily due to the timing of the Ariel Re acquisition in February 2017, as Ariel Re has a significant property contract subject to renewal in January of each year which was not included in our results for the same period of 2017. This was partially offset by the introduction of certain third party capital for Ariel Re and our resulting reduced participation in Syndicate 1910 in the current year. The decrease in net earned premiums for the year ended December 31, 2018 as compared to the same period in 2017 was also due to the aforementioned change in capital structure for Ariel Re related to the use of third party capital.

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The increase in gross written and earned premiums for the year ended December 31, 2017 as compared to the same period in 2016 was due to premiums written by Ariel Re and Argo Re, partially offset by planned premium reductions within Syndicate 1200. Ariel Re’s property business contributed $161.0 million and $64.5 million of gross written and earned premiums, respectively, while the growth at Argo Re was driven by inward reinstatement premiums received as a result of catastrophe activity during the year. Partially offsetting these increases were reduced gross written and earned premiums in Syndicate 1200 due to the combination of changes in our risk appetite, reducing exposures as part of our overall underwriting corrective actions following recent elevated loss activity. In addition, our ownership percentage for Syndicate 1200 decreased to 46.0% in 2017 as compared to 53.5% in 2016. Additionally, during the last six months of 2017, we recorded net outward reinstatement and other catastrophe-related premium adjustments associated with the third quarter 2017 catastrophe events which reduced net earned premiums by $12.8 million. We also purchased additional reinsurance contracts in connection with risk management activities following the acquisition of Ariel Re which reduced net earned premiums by $16.7 million, all within our Property lines.
Liability
The increase in gross written and earned premiums for the year ended December 31, 2018 as compared to the same period in 2017 was due to planned geographic expansion in our European operations, growth in new business writings in Syndicate 1200 in certain motor business, and increased writings in small-to-medium sized enterprise package business resulting from prior years of account binder premium increases. These growth drivers were partially offset by lower premium production coming from Bermuda as a result of the strategic decision to non-renew certain utility accounts.
The increase in gross written premiums for the year ended December 31, 2017 as compared to the same period in 2016 was primarily attributable to growth in our Bermuda casualty business due to the introduction of new products and a rate increase on a large policy that renewed during the third quarter of 2017. We also experienced growth from our European operations where we diversified and expanded our liability business in 2017. The decline in earned premiums for the year ended December 31, 2017 as compared to the same period in 2016 was primarily attributable to changes to the reinsurance structure in 2017, whereby we increased the amount of premiums we cede to external reinsurers.
Professional
The increase in gross written premiums for the year ended December 31, 2018 as compared to the same period in 2017 was primarily attributable to growth in our Syndicate 1200, Bermuda and European operations. Growth in Syndicate 1200 was due to increased writings in cyber, directors and officers, and medical malpractice. Bermuda increased their writings in errors and omissions and directors and officers lines, as well as benefiting from improving trading conditions and favorable rate changes. Our European operations also contributed to the professional lines growth in gross written and earned premiums as compared to the same period in 2017 as a result of significant new business growth.
The increase in gross written premiums for professional lines for the year ended December 31, 2017 as compared to the same period in 2016 was primarily attributable to growth in our Bermuda, Brazil and European professional lines. Growth in Bermuda professional was driven by new wage and hour and cyber accounts. In Europe, gross written premiums increased due to new business in the German market, as well as capitalizing on additional cyber and directors and officers opportunities in the United Kingdom. Our Brazil business experienced growth through our digital platform. Earned premiums were slightly lower for the year ended December 31, 2017 as compared to the same period in 2016 primarily due to increased ceded reinsurance and the reduction in our ownership participation in Syndicate 1200. For the year ended December 31, 2017, Ariel Re’s professional lines business contributed $2.1 million and $0.5 million of gross written and earned premiums, respectively
Specialty
The decrease in gross written and earned premiums for the year ended December 31, 2018 as compared to the same period in 2017 was due to the aforementioned change in capital structure of Ariel Re and the resulting reduced participation in Syndicate 1910 from the use of certain third party capital. Partially offsetting the decline in Ariel Re was gross written and earned premiums growth in Syndicate 1200 and our European operations. Syndicate 1200 growth was driven by marine and energy business, increases in political risks and prior year of account binder premium adjustments in cargo lines. European growth was driven by new business in the surety book, as well as the addition of ArgoGlobal SpA.
The increase in gross written and earned premiums for the year ended December 31, 2017 as compared to the same period in 2016 was primarily attributable to premiums written by Ariel Re. For the year ended December 31, 2017, Ariel Re contributed specialty lines gross written and earned premiums of $135.0 million and $58.3 million, respectively. Additionally, gross written and earned premiums were

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favorably impacted by increases within the surety and marine liability lines. Partially offsetting these increases were planned reductions in the aerospace division, and offshore energy due to continuing soft market conditions.
Loss and Loss Adjustment Expenses
The decrease in the loss ratio for the year ended December 31, 2018 as compared to the same period in 2017 was primarily attributable to a decline in catastrophe losses, net favorable development on prior accident year loss reserves in 2018 (compared to net unfavorable development on prior accident year loss reserves in 2017) and a 1.8 percentage point improvement in the current accident year non-catastrophe loss ratio. The increase in the loss ratio for the year ended December 31, 2017 as compared to the same period in 2016 was primarily attributable to increased catastrophe losses.
Included in losses and loss adjustment expense for the year ended December 31, 2018 was $37.3 million in catastrophe losses, primarily attributable to Hurricanes Florence and Michael, the Woolsey and Camp California wildfires, and other storms primarily outside the United States. Losses and loss adjustment expenses also included $9.5 million of net favorable loss reserve development on prior accident years, concentrated in the specialty and liability lines. We also experienced a number of discrete non-catastrophe current accident year marine and energy losses in 2018.
Included in losses and loss adjustment expense for the year ended December 31, 2017 was $107.6 million related to Ariel Re. Net catastrophe losses for the year ended December 31, 2017 (including Ariel Re) totaled $110.4 million, attributable to Hurricanes Harvey, Irma and Maria, the California wildfires, other storms primarily in the United States and the Mexican earthquakes. Losses and loss adjustment expenses also included $13.2 million of net unfavorable loss reserve development on prior accident years, concentrated in the property and liability lines, primarily due to the first quarter 2017 Ogden rate change and newly reported claims from Hurricane Matthew. Partially offsetting this unfavorable development was favorable development on the property reinsurance lines.
Included in losses and loss adjustment expense for the year ended December 31, 2016 was $49.7 million in catastrophe losses primarily from Hurricane Matthew, the Louisiana floods, other storm activity in the United States, the Alberta wildfires and the Taiwan and New Zealand earthquakes. Partially offsetting these catastrophe losses was $16.0 million of net favorable loss reserve development on prior accident years, primarily attributable to the property reinsurance lines, as well as general liability and property facultative business underwritten by our Lloyd’s Syndicate 1200.
Underwriting, Acquisition and Insurance Expenses
The decrease in the expense ratio for the year ended December 31, 2018 as compared to the same period in 2017 was primarily attributable to the increase in earned premiums related to growth from the expansion of our European operations. We also saw a favorable impact on our expense ratio compared to the same period in 2017 as a result of the aforementioned change in capital structure for Ariel Re and the use of certain third party capital, as well as additional quota share reinsurance purchased in the current year which resulted in increased ceding and profit commissions.
The increase in the expense ratio for the year ended December 31, 2017 as compared to the same period in 2016 was due in large part to the aforementioned $30.5 million reduction to earned premiums for catastrophe-related reinsurance premium adjustments and additional group reinsurance contracts purchased in connection with risk management activities following the acquisition of Ariel Re. These adjustments increased the expense ratio by 1.7 percentage points. Ariel Re contributed $31.6 million in underwriting expenses for the year ended December 31, 2017.
Fee and Other Income/Expense
Fee and other income represents amounts we receive in connection with the management of third party capital for our underwriting Syndicates at Lloyd’s. Fee and other income increased for the year ended December 31, 2018 as compared to the same period ended 2017 primarily due to fee income earned by Syndicate 1910, particularly from fees earned from third party capital providers introduced in 2018, as previously discussed.
The slight decrease in fee and other expenses for the year ended December 31, 2018 as compared to the same period in 2017 is primarily due to lower costs related to outside services and employee benefits.
Fee and other income increased for the year ended December 31, 2017 as compared to the same period ended 2016 primarily due to fee income earned by Syndicate 1910, as well as additional fee income earned by Syndicate 1200 due to the increase in ownership participation by third party capital providers in 2017.

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The increase in fee and other expenses for the year ended December 31, 2017 as compared to the same period in 2016 is primarily due to the costs incurred in 2017 associated with the startup of our digital affinity group business. In addition, the reduction to profit commissions payable to trade capital providers were less than in 2017 when compared to the reductions in 2016.
Run-off Lines
The following table summarizes the results of operations for the Run-off Lines segment:
 
For the Years Ended December 31,
(in millions)
2018
 
2017
 
2016
Earned premiums
$
0.3

 
$
(0.1
)
 
$
0.4

Losses and loss adjustment expenses
12.3

 
17.3

 
18.6

Underwriting, acquisition and insurance expenses
3.9

 
8.3

 
6.9

Underwriting loss
(15.9
)

(25.7
)

(25.1
)
Net investment income
8.1

 
9.3

 
11.3

Interest expense
(1.5
)
 
(1.5
)
 
(1.4
)
Loss before income taxes
$
(9.3
)

$
(17.9
)

$
(15.2
)
Earned premiums for the years ended December 31, 2018, 2017 and 2016 were attributable to final audits, reinstatement premiums and other adjustments on policies previously underwritten.
Through our subsidiary Argonaut Insurance Company, 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 Insurance Company 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 Insurance Company also assumed risk as a reinsurer, primarily for the period from 1970 to 1975, a portion of which was assumed from the London market. Argonaut Insurance Company 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 Insurance Company 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 Insurance Company.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses for the year ended December 31, 2018 included $12.3 million of net unfavorable loss reserve development on prior accident years, of which $7.4 million was in asbestos and environmental lines, with the remainder concentrated in other run-off lines.
Losses and loss adjustment expenses for the year ended December 31, 2017 included $17.3 million of net unfavorable loss reserve development on prior accident years driven by $13.6 million in asbestos and environmental lines due to increasing defense costs and an increase in the time claims remain open, and $5.9 million in other run-off lines, partially offset by net favorable loss reserve development on prior accident years of $2.2 million in Risk Management.
Losses and loss adjustment expenses for the year ended December 31, 2016 included $18.6 million of net unfavorable loss reserve development on prior accident years primarily attributable to $9.1 million in asbestos and environmental lines, $6.5 million in Risk Management and $3.0 million from our other run-off lines. The unfavorable development from our asbestos exposure was due to increased defense costs and a final settlement with a large primary insured.

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The following table represents a reconciliation of total gross and net reserves for the Run-off Lines. Amounts in the net column are reduced by reinsurance recoverables.
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
(in millions)
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
Asbestos and environmental:
 
 
 
 
 
 
 
 
 
 
 
Loss reserves, beginning of the year
$
55.9