ARGO GROUP INTERNATIONAL HOLDINGS, LTD. The discussion provides an analysis of the Company's financial condition, cash flows and results of operations from management's perspective and should be read in conjunction with the consolidated financial statements and related notes beginning on page F-1. Our objective is to also provide discussion of events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or of future financial condition and to offer information that provides understanding of our financial condition, cash flows and results of operations.
During 2022, the Company continued to simplify its business, focus on being a
For discussion of our results of operations and changes in financial conditions for the year endedDecember 31, 2021 compared to year endedDecember 31, 2020 refer to Part II. Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theSEC onMarch 16, 2022 and such discussion is incorporated herein by reference.
Forward-Looking Statements
This report includes forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "expect," "intend," "plan," "believe," "do not believe," "aim," "project," "anticipate," "seek," "will," "likely," "assume," "estimate," "may," "continue," "guidance," "growth," "objective," "remain optimistic," "improve," "progress," "path toward," "outlook," "trends," "future," "could," "would," "should," "target," "on track" and similar expressions of a future or forward-looking nature. Such statements are subject to certain risks and uncertainties that could cause actual events or results to differ materially including, but not limited to, recent changes in interest rates and inflation, the outcome of our exploration of strategic alternatives, the adequacy of our projected loss reserves, employee retention and changes in key personnel, the ability of our insurance subsidiaries to meet risk-based capital and solvency requirements, the outcome of legal and regulatory proceedings, investigations, inquiries, claims and litigation and other risks and uncertainties discussed in our filings with theSEC . For a more detailed discussion of such risks and uncertainties, see Part I, Item 1A, "Risk Factors." The inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that the Company's objectives will be achieved.Argo Group undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You should not place undue reliance on any such statements.
Recent Developments
OnFebruary 8, 2023 , we entered into an Agreement and Plan of Merger (the "Merger Agreement"), with Brookfield Reinsurance Ltd. ("Brookfield Reinsurance") andBNRE Bermuda Merger Sub Ltd. ("Merger Sub"), a wholly owned subsidiary of Brookfield Reinsurance. The Merger Agreement provides for the merger of the Merger Sub with and into us, which we refer to as the "Merger," with us surviving the Merger as a wholly owned subsidiary of Brookfield Reinsurance. Completion of the Merger is subject to customary closing conditions. In addition, the obligation of each party to consummate the Merger is conditioned upon, among other things, the accuracy of the representations and warranties of the other party (subject to certain materiality exceptions), and material compliance by the other party with its covenants under the Merger Agreement. Therefore, the Merger may not be completed as timely as expected or at all. In addition, if the Merger is not completed byNovember 8, 2023 (which date may be extended untilFebruary 8, 2024 if all conditions to the Merger are satisfied or waived other than obtaining required regulatory approvals), either we or Brookfield Reinsurance may choose to terminate the Merger Agreement. Either party may also elect to terminate the Merger Agreement in certain other circumstances, including by mutual written consent of both parties.
The foregoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to and qualified in its entirety by reference to the Merger Agreement, a copy of which is filed as Exhibit 2.1 to this Annual Report on Form 10-K.
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Consolidated Results of Operations
For the year endedDecember 31, 2022 , we reported a net loss attributable to common shareholders of$185.7 million ($5.31 per diluted common share) as compared to a net loss of$3.8 million ($0.11 per diluted common share) for the year endedDecember 31, 2021 .
The following is a comparison of selected data from our results of operations, as well as book value per common share, for the relevant periods:
For the Years Ended December 31,
(in millions) 2022 2021 2020
Gross written premiums $ 2,848.1 $ 3,181.2 $ 3,233.3
Earned premiums $ 1,740.4 $ 1,910.1 $ 1,780.5
Net investment income 129.8 187.6 112.7
Net investment and other gains (losses):
Net realized investment and other gains (losses) (115.9) 72.4 26.0
Change in fair value recognized 3.1 (40.4) 10.3
Change in allowance for credit losses on fixed maturity securities
(2.5) 0.6 (39.9)
Total net investment and other gains (losses) (115.3) 32.6 (3.6)
Total revenue $ 1,754.9 $ 2,130.3 $ 1,889.6
Income (loss) before income taxes $ (183.2) $ 5.3 $ (46.4)
Income tax provision (benefit) (8.0) (1.4) 7.7
Net income (loss) $ (175.2) $ 6.7 $ (54.1)
Less: Dividends on preferred shares 10.5 10.5 4.6
Net income (loss) attributable to common shareholders
$ (3.8) $ (58.7) GAAP ratios: Loss ratio 67.0 % 68.8 % 67.9 % Expense ratio 38.6 % 36.8 % 37.5 % Combined ratio 105.6 % 105.6 % 105.4 % December 31, 2022 December 31, 2021 Book value per common share $ 31.06 $ 45.62
The table above includes ratios in accordance with
•Loss ratio: the ratio of claims and claims expense to premiums earned. Loss ratios include the impact of catastrophe losses.
•Expense ratio: the ratio of underwriting, acquisition and insurance expense to premiums earned.
•Combined ratio: the sum of the loss ratio and the expense ratio. The difference
between 100% and the combined ratio represents underwriting income (loss) as a
percentage of premiums earned, or underwriting margin (loss).
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Impact of COVID-19
The global COVID-19 pandemic, including the arrival of new strains of the virus, resulted in significant disruptions in economic activity and financial markets. While the Company's consolidated net investment income benefited from the gradual improvement of economic conditions as the impact of the pandemic lessened during 2021 and 2022, COVID-19 has directly and indirectly adversely affected the Company and may continue to do so for an uncertain period of time. The Company did not incur any COVID-19 catastrophe losses during the year endedDecember 31, 2022 , as compared to$12.4 million for the year endedDecember 31, 2021 . Capital resources were adversely impacted during 2022 by rising interest rates and decreasing fixed income portfolio values which may be connected to the changes in supply and demand created during the COVID-19 pandemic. Our liquidity was not materially impacted by COVID-19 during the year endedDecember 31, 2022 or 2021. Although vaccines are now available, the extent to which COVID-19 (including emerging new strains of the COVID-19 virus) will continue to impact our business will depend on future developments that cannot be predicted, and while we have recorded our best estimates of this impact as of and for the year endedDecember 31, 2022 , actual results in future periods could materially differ from those disclosed herein.
Non-GAAP Measures
In the following discussion and analysis of our results of operations, we have
included certain non-generally accepted accounting principles ("non-GAAP")
financial measures. We believe that these non-GAAP measures, specifically
current accident year non-catastrophe losses, current accident year
non-catastrophe loss ratio and current accident year non-catastrophe combined
ratios, which may be defined differently by other companies, explain our results
of operations in a manner that allows for an understanding of the underlying
trends in our business. However, these measures should not be viewed as a
substitute for those determined in accordance with GAAP. Reconciliations of
these financial measures to their most directly comparable GAAP measures are
included in the tables below.
For the Years Ended
2022 2021 2020
(in millions) Amount Ratio Amount Ratio Amount Ratio
Earned premiums $ 1,740.4 $ 1,910.1 $ 1,780.5
Losses and loss adjustment expenses,
as reported $ 1,166.9 67.0 % $ 1,314.6 68.8 % $ 1,208.8 67.9 %
Adjustments:
Favorable (unfavorable) prior accident
year loss development (64.7) (3.7) % (138.3) (7.2) % (7.7) (0.4) %
Catastrophe losses, including COVID-19 (44.0) (2.5) % (92.7) (4.8) % (179.2) (10.1) %
Current accident year non-catastrophe
losses (non-GAAP) $ 1,058.2 60.8 % $ 1,083.6 56.8 % $ 1,021.9 57.4 %
Expense ratio 38.6 % 36.8 % 37.5 %
Current accident year non-catastrophe
combined ratio (non-GAAP) 99.4 % 93.6 % 94.9 %
Current accident year non-catastrophe losses, current accident year
non-catastrophe loss ratio and current accident year non-catastrophe combined
ratio are internal performance measures used by the Company to evaluate its
underwriting activity by excluding catastrophe losses and the impact of changes
to prior year loss reserves. Management believes that these non-GAAP metrics
measure performance in a way that is useful to investors as it removes the
impact of volatile and unpredictable catastrophe losses and prior accident year
reserve development.
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The following table presents our current accident year non-catastrophe losses,
current accident year non-catastrophe loss ratio and current accident year
non-catastrophe combined ratio adjusted for the one-time cost of the 2022 U.S.
LPT transaction:
For the Years Ended
2022 2021 2020
(in millions) Amount Ratio Amount Ratio Amount Ratio
Earned premiums, as reported $ 1,740.4 $ 1,910.1 $ 1,780.5
Adjustment: Ceded premiums for U.S.
LPT 121.0 - -
Earned premiums, post adjustments $ 1,861.4 $ 1,910.1 $ 1,780.5
Losses and loss adjustment expenses,
as reported $ 1,166.9 62.7 % $ 1,314.6 68.8 % $ 1,208.8 67.9 %
Adjustments:
Favorable (unfavorable) prior accident
year loss development (64.7) (3.5) % (138.3) (7.2) % (7.7) (0.4) %
Catastrophe losses, including COVID-19 (44.0) (2.4) % (92.7) (4.8) % (179.2) (10.1) %
Current accident year non-catastrophe
losses (non-GAAP) $ 1,058.2 56.8 % $ 1,083.6 56.8 % $ 1,021.9 57.4 %
Acquisition expenses, as reported$ 670.7 $ 702.3 $ 667.7 Adjustment: U.S. LPT (10.5) (0.6) % 0 - % 0 - % Acquisition expenses, post adjustments$ 660.2 35.5 %$ 702.3 36.8 %$ 667.7 37.5 % Current accident year non-catastrophe combined ratio (non-GAAP) 92.3 % 93.6 % 94.9 %
Gross Written and Net Earned Premiums
Consolidated gross written and net earned premiums by our four primary insurance lines were as follows:
For the Years Ended December 31,
2022 2021 2020
(in millions) Gross Written Net Earned Gross Written Net Earned Gross Written Net Earned
Property $ 405.0 $
231.6
$ 313.1 Liability (1) 1,302.0 702.3 1,351.3 804.1 1,302.3 776.1 Professional 619.0 443.9 730.1 463.4 648.3 365.4 Specialty 522.1 362.6 551.7 360.3 517.6 325.9 Total$ 2,848.1 $ 1,740.4 $ 3,181.2 $ 1,910.1 $ 3,233.3 $ 1,780.5 (1) Ceded premium of$121.0 million for theU.S. LPT has been included in the Liability line to align with the majority of the subject reserves covered under the agreement. Gross written premiums decreased$333.1 million , or 10.5%, for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . The decrease in gross written premiums is primarily attributable to the sale of Argo Seguros and ourMalta operations as well as businesses we are exiting, including contract binding and excess and surplus ("E&S") property businesses in theU.S. ,London direct and facultative and North American binder business in our International Operations. Underwriting actions executed on certain delegated authority programs during 2022 further contributed to the decrease. BothU.S. Operations and International Operations continued to see overall rate increases (single to low double digits) during 2022 and 2021. Consolidated earned premiums decreased$169.7 million , or 8.9%, for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . The Company entered into a loss portfolio transfer for ourU.S. casualty insurance reserves, including construction, for accident years 2011 to 2019, which accounted for$121.0 million of the overall decrease. The remainder of the decrease is primarily driven by the sale of Argo Seguros and ourMalta operations and the exiting of certain business lines in our European operations, which was partially offset by an increase in ourU.S. Operations across multiple business lines. The main drivers of growth in ourU.S. operations include higher premium retention due to a decrease in ceded written and earned premiums, and additional growth from garage, in-land marine, surety and casualty. 63
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Our gross written and earned premiums are further discussed by reporting segment and major lines of business below under the heading "Segment Results."
Net Investment Income
Consolidated net investment income decreased$57.8 million , or 30.8%, for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . The decrease in net investment income is primarily attributable to a reduction in income from our alternative investment portfolio which includes earnings from both private equity and hedge fund investments. The decrease was partially offset by our higher yields from our fixed maturities portfolio. Total invested assets atDecember 31, 2022 were$3,651.9 million , which excludes invested assets reclassified to Assets held-for-sale on our Consolidated Balance Sheets for the sale of our Syndicate 1200 business. Additionally, our total invested assets decreased by approximately$519.1 million as the Company transferred investments to Enstar as part of theU.S. LPT transaction. Total invested assets atDecember 31, 2021 were$5,233.0 million , net of$89.6 million of invested assets attributable to our Syndicate 1200 and 1910 trade capital providers.
Net Investment and Other Gains and Losses
Consolidated net investment and other gains and losses decreased$147.9 million for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . Consolidated net realized investment losses of$115.3 million for the year endedDecember 31, 2022 included losses related to the sale of Argo Seguros and AGSE, of which$31.8 million related to historical foreign currency translation losses which were previously recognized in accumulated other comprehensive income, resulting in no impact to total shareholders' equity from this reclassification. The Company also recognized$37.6 million of realized losses from the sale of assets transferred to Enstar as part of theU.S. LPT transaction, of which$34.2 million was an impairment recognizing losses that were previously included in accumulated other comprehensive income. The remainder of the change is primarily driven from increased net realized losses on foreign currency forward contracts in 2022 as compared to 2021.
Losses and Loss Adjustment Expense
Net consolidated losses and loss adjustment expenses decreased$147.7 million , or 11.2%, for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . The consolidated loss ratio for the year endedDecember 31, 2022 was 67.0%, compared to 68.8% for the same period in 2021. The improvement was driven by a decrease in net unfavorable prior year development in 2022 as compared to 2021 (3.5 percentage points) and a decrease in catastrophe losses (2.3 percentage points), partially offset by a higher current accident year non-catastrophe loss ratio (4.0 percentage points). Catastrophe losses of$44.0 million for the year endedDecember 31, 2022 were attributable to Hurricane Ian, Winter Storm Elliott, theUkraine /Russia conflict, and other small events. The following table summarizes the above referenced prior-year loss reserve development for the year endedDecember 31, 2022 with respect to net loss reserves by line of business as ofDecember 31, 2021 . The net unfavorable prior-year reserve development of$64.7 million is made up of unfavorable prior year reserves development of$64.5 million inU.S. Operations and$2.9 million in Run-off Lines partially offset by$2.7 million of net favorable prior year reserve development in International Operations. Our losses and loss adjustment expenses, including the prior-year loss reserve development shown in the following table, are further discussed by reporting segment under the heading "Segment Results" below. Net Reserve Development (Favorable)/ (in millions) Net Reserves 2021 Unfavorable Percent of 2021 Net Reserves Property $ 300.6 $ 9.9 3.3 % Liability 2,069.0 74.0 3.6 % Professional 474.2 9.6 2.0 % Specialty 279.4 (28.8) (10.3) % Total 3,123.2 64.7 2.1 % In determining appropriate reserve levels for the year endedDecember 31, 2022 , 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 64
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emerging trends in the paid and reported loss data. While prior accident years' net reserves for losses and loss adjustment expenses for some lines of business have developed favorably in recent years, this does not imply that more recent accident years' reserves also will develop favorably; pricing, reinsurance costs, legal environment, general economic conditions including changes in inflation and many other factors impact our ultimate loss estimates. Consolidated gross reserves for losses and loss adjustment expenses were$5,051.6 and$5,595.0 as ofDecember 31, 2022 andDecember 31, 2021 , respectively. (The decrease of gross reserves was primarily driven by held-for-sale reclassification of our Syndicate 1200 business. Please refer to Note 2, "Recent Acquisitions, Disposals & Other Transactions," in the Notes to the Consolidated Financial Statements.) 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 Expense
Consolidated underwriting, acquisition and insurance expense decreased$31.6 million , or 4.5%, for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . The decrease in the underwriting, acquisition and insurance expense was primarily driven by the sale of Argo Seguros and ourMalta operations. The consolidated expense ratio increased 1.8% to 38.6% for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 primarily due to our decrease in net earned premium driven by the cost of ourU.S. LPT. Non-Operating Expenses Non-operating expenses represent costs not associated with our ongoing insurance or other operations, including severance expenses, certain legal costs, merger and acquisition and other transaction-related expenses, and certain non-recurring expenses. As such, non-operating expenses have been excluded from the calculation of our expense ratio. These non-recurring costs are included in the line item Non-operating expenses in the Company's Consolidated Statements of Income (Loss). Non-operating expenses increased$7.8 million , or 17.8%, for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . For the year endedDecember 31, 2022 , our non-operating expenses consisted primarily of advisory fees driven by the exploration of the Company's strategic alternatives announced in the second quarter of 2022 and contested proxy process. For the year endedDecember 31, 2021 , our non-operating expenses consisted primarily of capitalized asset impairments as well as impairments and other expenses related toU.S. andU.K. office closures. In both years, non-operating expenses also included severance and retention bonuses and settlements.
Interest Expense
Consolidated interest expense increased$5.2 million , or 24.1%, to$26.8 million for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . The year-over-year increase was primarily attributable to higher short-term interest rates in 2022.
Foreign Currency Exchange Gain (Loss)
Consolidated foreign currency exchange gains increased$6.6 million for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . The changes in the foreign currency exchange gains were due to fluctuations of theU.S. Dollar, on a weighted average basis, against the Canadian Dollar, Euro and the British Pound.
Impairment of
As a result of the announced sale ofArgo Underwriting Agency Limited and its Lloyd's Syndicate 1200, an estimated fair value was established for Syndicate 1200 that was below its carrying value. As such, we recorded a$28.5 million impairment charge in the third quarter of 2022, consisting of$17.3 million of indefinite lived intangible assets and$11.2 million of goodwill. 65
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Income Tax Provision
The consolidated income tax provision represents the income tax expense or benefit associated with our operations based on the tax laws of the jurisdictions in which we operate. Therefore, the consolidated provision for income taxes represents taxes on net income for ourBrazil ,Ireland ,Italy ,Malta ,Switzerland ,U.K. andU.S. operations. The consolidated benefit for income taxes was$8.0 million for the year endedDecember 31, 2022 , compared to a provision of$1.4 million for the year endedDecember 31, 2021 . The consolidated effective tax rates were 4.3% and (26.4)% for the years endedDecember 31, 2022 and 2021, respectively. The primary drivers for the fluctuation in the effective tax rate resulted from the sale of ourBrazil operations inFebruary 2022 andMalta operations inSeptember 2022 . TheBrazil realized foreign exchange loss was excluded from tax calculations, and the tax benefits related to the capital loss inIreland were offset by a valuation allowance. Separately, theMalta capital loss reported inBermuda received no tax benefit. Additionally, an impairment charge related toU.K. goodwill and intangible assets was recorded which received no tax benefit. Excluding the sale ofBrazil andMalta , as well as the goodwill and intangibles impairment, the effective tax rate for the period endingDecember 31, 2022 was more aligned with statutory tax rates. Segment Results We are primarily engaged in writing property and casualty insurance. 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 products, production sources, distribution strategies and regulatory environment, in determining how to aggregate reporting segments.
Our reportable segments include four primary insurance services and offerings as follows:
•Property includes both property insurance and reinsurance products. Insurance products cover commercial properties primarily inNorth America with some international covers. Reinsurance covers underlying exposures located throughout the world, includingthe United States . These offerings include coverages for man-made and natural disasters.
•Liability includes a broad range of primary and excess casualty products
primarily underwritten as insurance and, to a lesser extent reinsurance, for
risks on both an admitted and non-admitted basis in
•Professional includes various professional lines products including errors and omissions and management liability coverages (including directors and officers).
•Specialty includes niche insurance coverages including marine and energy, credit and political risk, political violence 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. 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.
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.
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The following table summarizes the results of operations for theU.S. Operations segment: For the Years Ended December 31, (in millions) 2022 2021 2020 Gross written premiums$ 1,940.6 $ 2,069.4 $ 1,994.8 Earned premiums$ 1,209.0 $ 1,283.7 $ 1,207.6 Losses and loss adjustment expenses 870.1 908.2 768.7 Underwriting, acquisition and insurance expenses 432.8 419.3 389.7 Underwriting income (loss) (93.9) (43.8) 49.2 Net investment income 88.4 119.4 80.3 Interest expense 17.5 14.1 16.2 Fee and other expense (income), net (0.1) 0.4 0.2 Income (loss) before income taxes$ (22.9) $ 61.1 $ 113.1 GAAP ratios: Loss ratio 72.0 % 70.7 % 63.7 % Expense ratio 35.8 % 32.7 % 32.2 % Combined ratio 107.8 % 103.4 % 95.9 % Loss reserves at December 31$ 3,718.1
The table above includes underwriting income (loss) which is an internal performance measure that we use to measure our insurance profitability. We believe underwriting income (loss) enhances an investor's understanding of insurance operations profitability. Underwriting income (loss) is calculated as earned premiums less losses and loss adjustment expenses less underwriting, acquisition and insurance expense. Although underwriting income (loss) does not replace net income (loss) computed in accordance with GAAP as a measure of profitability, management uses underwriting income (loss) to focus our reporting segments on generating operating income. The following table contains a reconciliation of certain non-GAAP financial measures, specifically the current accident year non-catastrophe losses, current accident year non-catastrophe loss ratio and current accident year non-catastrophe combined ratio, to their most directly comparable GAAP measures for ourU.S. Operations.
For the Years Ended
2022 2021 2020
(in millions) Amount Ratio Amount Ratio Amount Ratio
Earned premiums $ 1,209.0 $ 1,283.7 $ 1,207.6
Losses and loss adjustment expenses,
as reported $ 870.1 72.0 % $ 908.2 70.7 % $ 768.7 63.7 %
Adjustments:
Favorable (unfavorable) prior accident
year loss development (64.5) (5.3) % (120.9) (9.4) % (2.4) (0.2) %
Catastrophe losses, including COVID-19 (13.2) (1.1) % (36.1) (2.8) % (56.2) (4.6) %
Current accident year non-catastrophe
losses (non-GAAP) $ 792.4 65.6 % $ 751.2 58.5 % $ 710.1 58.9 %
Expense ratio 35.8 % 32.7 % 32.2 %
Current accident year non-catastrophe
combined ratio (non-GAAP) 101.4 % 91.2 % 91.1 %
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The following table presents our current accident year non-catastrophe losses,
current accident year non-catastrophe loss ratio and current accident year
non-catastrophe combined ratio adjusted for the one-time cost for the 2022 U.S.
LPT transaction:
For the Years Ended
2022 2021 2020
(in millions) Amount Ratio Amount Ratio Amount Ratio
Earned premiums, as reported $ 1,209.0 $ 1,283.7 $ 1,207.6
Adjustment: Ceded premiums for U.S.
LPT 121.0 0.0 -
Earned premiums, post adjustments $ 1,330.0 $ 1,283.7 $ 1,207.6
Losses and loss adjustment expenses,
as reported $ 870.1 65.4 % $ 908.2 70.7 % $ 768.7 63.7 %
Adjustments:
Favorable (unfavorable) prior accident
year loss development (64.5) (4.8) % (120.9) (9.4) % (2.4) (0.2) %
Catastrophe losses, including COVID-19 (13.2) (1.0) % (36.1) (2.8) % (56.2) (4.6) %
Current accident year non-catastrophe
losses (non-GAAP) $ 792.4 59.6 % $ 751.2 58.5 % $ 710.1 58.9 %
Acquisition expenses, as reported$ 432.8 $ 419.3 $ 389.7 Adjustment: U.S. LPT (10.5) (0.8) % 0 - % 0 - % Acquisition expenses, post adjustments$ 422.3 31.8 %$ 419.3 32.7 %$ 389.7 32.2 % Current accident year non-catastrophe combined ratio (non-GAAP) 91.4 % 91.2 % 91.1 %
Gross Written and Net Earned Premiums
Gross written and net earned premiums by our four primary insurance lines were
as follows:
For the Years Ended December 31,
2022 2021 2020
(in millions) Gross Written Net Earned Gross Written Net Earned Gross Written Net Earned
Property $ 214.3 $
148.8
$ 155.5 Liability (1) 1,073.7 576.7 1,093.6 672.8 1,060.6 674.2 Professional 410.5 310.0 504.1 315.1 438.3 244.9 Specialty 242.1 173.5 218.7 145.9 195.9 133.0 Total$ 1,940.6 $ 1,209.0 $ 2,069.4 $ 1,283.7 $ 1,994.8 $ 1,207.6 (1) Ceded premium of$121.0 million for theU.S. LPT has been included in the Liability line to align with the majority of the subject reserves covered under the agreement. Property Gross written premiums for property decreased$38.7 million , or 15.3%, for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . The decreases were driven from the sale of our contract binding and excess and surplus ("E&S") property business units. This was partially offset by growth from the garage, inland marine and fronting business units. The decrease in net earned premiums for the year endedDecember 31, 2022 compared to the same period in 2021 was also due to the sale of the business units, noted above, offset by growth in the inland marine and garage business units. 68
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Liability
Gross written premiums for liability decreased$19.9 million , or 1.8%, for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . The decrease was driven by the sale of our contract binding business unit and underwriting actions taken with the delegated authority programs. This was partially offset by growth in general liability, environmental and workers compensation lines. Net earned premiums decreased$96.1 million , or 14.3%, for the year endedDecember 31, 2022 compared to the same period in 2021, due primarily toU.S. LPT for ourU.S. casualty insurance reserves, including construction, for accident years 2011 to 2019, which accounted for$121.0 million of the overall decrease. The decrease was partially offset by higher premium retention. Professional Gross written premiums for professional decreased$93.6 million , or 18.6%, for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . The decrease was driven by underwriting actions taken with the delegated authority programs and a softer management liability market. Net earned premiums decreased$5.1 million , or 1.6%, for the year endedDecember 31, 2022 compared to the same period in 2021. Specialty Gross written premiums increased$23.4 million or 10.7%, for the year endedDecember 31, 2022 as compared to theDecember 31, 2021 due primarily to growth in surety and specialty program lines. The growth in net earned premiums for the year endedDecember 31, 2022 as compared to theDecember 31, 2021 was also largely due to surety lines.
Loss and Loss Adjustment Expenses
Loss and loss adjustment expenses were$870.1 million and$908.2 million for the year endedDecember 31, 2022 , and 2021 respectively. The loss ratios for the years endedDecember 31, 2022 and 2021 were 72.0% and 70.7%, respectively. The higher loss ratio in 2022 was driven by an increase in the current accident year non-catastrophe loss ratio (7.1 percentage point increase) partially offset by lower net unfavorable prior-year reserve development in 2022 versus 2021 (4.1 percentage points decrease) and a decrease in catastrophe losses (1.7 percentage point decrease). The current accident year non-catastrophe loss ratios for the year endedDecember 31, 2022 and 2021 were 65.6% and 58.5%, respectively. The current accident year non-catastrophe loss ratio for the year endedDecember 31, 2022 was impacted by the cost of theU.S. loss portfolio transfer, included in net earned premium, which increased the current accident year non-catastrophe loss for the year endedDecember 31, 2022 by 6 percentage points. The current accident year non-catastrophe loss for the year endedDecember 31, 2022 was also impacted by expectations of increased losses due to inflation. Net unfavorable prior-year reserve development, included in the income statement, for the year endedDecember 31, 2022 was$64.5 million (5.3 percentage points). The net unfavorable prior-year reserve development for the year endedDecember 31, 2022 primarily related to liability lines, including the impact of large losses and claims alleging construction defect, partially offset by favorable development in specialty and professional lines. The unfavorable prior year development was largely driven by businesses we have exited, and relates to accident years 2019 and prior partially offset by favorable prior year development on accident years 2020 and 2021. The net unfavorable prior-year reserve development for the year endedDecember 31, 2021 was$120.9 million (9.4 percentage points), primarily related to liability lines, including claims alleging construction defect, and professional lines partially offset by favorable prior-year reserve development in specialty lines. The liability lines and professional lines prior-year development was largely due to movements in the fourth quarter 2021. The internal analysis of liability lines completed during the fourth quarter of 2021 saw an increase in the difference between the actual incurred loss movements versus the expected movements in business units with significant exposure to claims alleging construction defect, driven by accident years 2017 and prior. In addition, during the fourth quarter of 2021, we received the results of an external actuarial review. The result of the external review on these lines was consistent with the internal analysis. The internal analysis of professional lines completed during the fourth quarter of 2021 incorporated evaluations of individual Securities Class Action claims. In addition, during the fourth quarter of 2021, we received the results of an external actuarial review. The result of the external review on these lines was consistent with the internal analysis. The professional lines prior-year development was driven by accident years 2018 and prior. Catastrophe losses for the year endedDecember 31, 2022 were$13.2 million (1.1 percentage points) and were mainly attributable to Hurricane Ian, Winter Storm Elliott, andU.S. storms. Catastrophe losses for the year endedDecember 31, 2021 were$36.1 million (2.8 percentage points) and were mainly attributable to Winter Storm Uri, and a number of smaller storms across theU.S. including Hurricane Ida. 69
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Underwriting, Acquisition and Insurance Expenses
Underwriting, acquisition and insurance expenses were$432.8 million for the year endedDecember 31, 2022 as compared to$419.3 million for the year endedDecember 31, 2021 . The expense ratio increased to 35.8% for the year endedDecember 31, 2022 as compared to 32.7% for the same period 2021. The deterioration in the ratio was mainly due to lower net earned premiums driven from the one-time cost of theU.S. LPT as well as increased acquisition expenses.
International Operations
The following table summarizes the results of operations for the International
Operations segment:
For the Years Ended December 31,
(in millions) 2022 2021 2020
Gross written premiums $ 906.7 $ 1,111.0 $ 1,238.0
Earned premiums $ 530.5 $ 625.8 $ 572.5
Losses and loss adjustment expenses 293.9 362.1 428.6
Underwriting, acquisition and insurance expenses 205.3 246.3 241.6
Underwriting income (loss) 31.3 17.4 (97.7)
Net investment income 39.1 50.6 26.7
Interest expense 7.8 5.6 7.7
Fee and other expense (income), net (1.2) (1.7) (3.4)
Income (loss) before income taxes $ 63.8 $ 64.1 $ (75.3)
GAAP ratios:
Loss ratio 55.4 % 57.9 % 74.9 %
Expense ratio 38.7 % 39.3 % 42.2 %
Combined ratio 94.1 % 97.2 % 117.1 %
Loss reserves at December 31 $ 1,100.4
The following table contains a reconciliation of certain non-GAAP financial
measures, specifically the current accident year non-catastrophe losses, current
accident year non-catastrophe loss ratio and current accident year
non-catastrophe combined ratio, to their most directly comparable GAAP measures
for our International Operations.
For the Years Ended
2022 2021 2020
(in millions) Amount Ratio Amount Ratio Amount Ratio
Earned premiums $ 530.5 $ 625.8 $ 572.5
Losses and loss adjustment expenses,
as reported $ 293.9 55.4 % $ 362.1 57.9 % $ 428.6 74.9 %
Adjustments:
Favorable (unfavorable) prior accident year loss development 2.7 0.5 % 26.9 4.3 % 6.2 1.1 % Catastrophe losses, including COVID-19 (30.8) (5.8) % (56.6) (9.1) % (123.0) (21.5) % Current accident year non-catastrophe losses (non-GAAP)$ 265.8 50.1 %$ 332.4 53.1 %$ 311.8 54.5 % Expense ratio 38.7 % 39.3 % 42.2 % Current accident year non-catastrophe combined ratio (non-GAAP) 88.8 % 92.4 % 96.7 % 70
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Gross Written and Net Earned Premiums
Gross written and net earned premiums by our four primary insurance lines were as follows:
For the Years Ended December 31,
2022 2021 2020
Gross
(in millions) Written Net Earned Gross Written Net Earned Gross Written Net Earned
Property $ 190.7 $ 82.8 $ 295.1 $ 132.4 $ 465.1 $ 157.6
Liability 227.5 124.7 256.8 130.7 241.2 101.5
Professional 208.5 133.9 226.0 148.3 210.0 120.5
Specialty 280.0 189.1 333.1 214.4 321.7 192.9
Total $ 906.7 $ 530.5 $ 1,111.0 $ 625.8 $ 1,238.0 $ 572.5
Property
Gross written premiums for property decreased $104.4 million , or 35.4%, for the
twelve months ended December 31, 2022 , as compared to the same period in 2021.
The decrease in gross written premiums was primarily due to a reduction in
business produced by Syndicate 1200 following our exit from certain property
lines of business and other international platforms where we have stopped
writing business. Net earned premiums for property decreased for the twelve
months ended December 31, 2022 , as compared to the same period in 2021 for the
aforementioned reasons.
Liability
Gross written premiums for liability decreased $29.3 million , or 11.4%, for the
twelve months ended December 31, 2022 as compared to the same period in 2021.
The reduction in gross written premiums was primarily due to lower premiums from
Europe where have stopped writing business and sold ArgoGlobal SE as well as
lower premiums from our Bermuda Insurance operations where we are writing less
excess casualty business. Net earned premiums decreased for the twelve months
ended December 31, 2022 as compared to the twelve months ended December 31, 2021
for the aforementioned reasons.
Professional
Gross written premiums for professional lines decreased$17.5 million , or 7.7%, for the twelve months endedDecember 31, 2022 as compared to the same period in 2021. The decrease in gross written premiums was driven by the sale of Argo Seguros and was partially offset by higher premiums in Syndicate 1200 arising from growth within Professional Indemnity and Transactional Liability business. The decrease in net earned premiums for the twelve months endedDecember 31, 2022 as compared to the twelve months endedDecember 31, 2021 was also mainly due to the sale of Argo Seguros.
Specialty
Gross written premiums decreased$53.1 million , or 15.9%, for the twelve months endedDecember 31, 2022 as compared to the same period in 2021. The decrease in gross written premiums was primarily driven by the sales of Argo Seguros and Ariel Re and was partially offset by growth in Syndicate 1200 primarily from strong business activity written in Terror & Political Violence. The decrease in net earned premiums for the twelve months endedDecember 31, 2022 as compared to the twelve months endedDecember 31, 2021 was driven by the aforementioned reasons.
Loss and Loss Adjustment Expenses
Loss and loss adjustment expenses were$293.9 million and$362.1 million for the year endedDecember 31, 2022 , and 2021 respectively. The loss ratios for the years endedDecember 31, 2022 and 2021 were 55.4% and 57.9%, respectively. The decrease in the loss ratio was driven by a decrease in catastrophe losses (3.3 percentage point decrease) and a decrease in the current accident year non-catastrophe loss ratio (3.0 percentage point decrease), partially offset by less net favorable prior-year reserve development in 2022 versus 2021 (3.8 percentage point increase). The current accident year non-catastrophe loss ratios for the years endedDecember 31, 2022 and 2021 were 50.1% and 53.1%, respectively. The improvement in the loss ratio for the years endedDecember 31, 2022 primarily related to the results of re-underwriting actions across multiple divisions in Syndicate 1200. The current accident year non-catastrophe loss ratio also benefited from rate increases earning through earned premiums and favorable experience in Property and Specialty lines. 71
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Net favorable prior-year reserve development for the year endedDecember 31, 2022 was$2.7 million (0.5 percentage points) and primarily related to favorable development in liability and specialty lines, partially offset by unfavorable development from professional and property lines. The professional lines development included large claim movements in Argo Insurance Bermuda.
The net favorable prior-year reserve development for the year ended
Catastrophe losses for the year endedDecember 31, 2022 was$30.8 million (5.8 percentage points) due to Hurricane Ian, Winter storm Elliott, and theUkraine -Russia conflict. Catastrophe losses for the year endedDecember 31, 2021 were$56.6 million (9.1 percentage points) including losses of$12.4 million associated with COVID-19, primarily resulting from contingency exposures. The property losses relate to sub-limited affirmative business interruption coverage in certain International markets, as well as expected costs associated with potential litigation. The remaining catastrophe losses of$44.2 million for the year endedDecember 31, 2021 were mainly attributable to Winter storm Uri, Hurricane Ida andU.S. tornadoes.
Underwriting, Acquisition and Insurance Expenses
Underwriting, acquisition and insurance expenses decreased to$205.3 million for the year endedDecember 31, 2022 as compared to$246.3 million for the year endedDecember 31, 2021 mainly driven by the sale of Argo Seguros and ArgoGlobal SE. The expense ratio decreased to 38.7% for the year endedDecember 31, 2022 as compared to 39.3%, which is broadly consistent with the same period in 2021.
Fee and Other Income/Expense
Fee and other income/expense represent amounts we receive, and costs we incur, in connection with the management of third-party capital for our underwriting Syndicates at Lloyd's. Fee and other income was$1.2 million for the year endedDecember 31, 2022 compared to$1.7 million for the same period in 2021.
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) 2022 2021 2020
Earned premiums $ 0.9 $ 0.6 $ 0.4
Losses and loss adjustment expenses 2.9 44.3 11.5
Underwriting, acquisition and insurance expenses 1.6 1.0 1.7
Underwriting income (loss) (3.6) (44.7) (12.8)
Net investment income 2.3 3.6 4.0
Interest expense 0.5 0.4 0.8
(Loss) income before income taxes $ (1.8) $ (41.5) $ (9.6)
Run-off Lines includes liabilities associated with other liability policies that
were issued in the 1960s, 1970s and into the 1980s, as well as the former
risk-management business and other business no longer underwritten. Through our
subsidiary Argonaut Insurance Company ("Argonaut"), we are exposed to asbestos
liability at the primary level through claims filed against our direct insureds,
as well as through its position as a reinsurer of other primary carriers.
Argonaut has direct liability arising primarily from policies issued from the
1960s to the early 1980s, which pre-dated policy contract wording that excluded
asbestos exposure. The majority of the direct policies were issued on behalf of
small contractors or construction companies. We believe that the frequency and
severity of asbestos claims for such insureds is typically less than that
experienced for large, industrial manufacturing and distribution concerns.
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Argonaut assumed risk as a reinsurer, primarily for the period from 1970 to 1975, a portion of which was assumed from theLondon market. Argonaut also reinsured risks on policies written by domestic carriers. Such reinsurance typically provided coverage for limits attaching at a relatively high level, which are payable only after other layers of reinsurance are exhausted. Some of the claims now being filed on policies reinsured by Argonaut are on behalf of claimants who may have been exposed at some time to asbestos incorporated into buildings they occupied, but have no apparent medical problems resulting from such exposure. Additionally, lawsuits are being brought against businesses that were not directly involved in the manufacture or installation of materials containing asbestos. We believe that a significant portion of claims generated out of this population of claimants may result in incurred losses generally lower than the asbestos claims filed over the past decade and could be below the attachment level of Argonaut.
Losses and Loss Adjustment Expenses
The following table represents a roll forward of total gross and net loss reserves for the asbestos and environmental exposures in our Run-off Lines, along with the ending balances of all other reserves within Run-off Lines. Amounts in the net column are reduced by reinsurance recoverables.
For the Years Ended
2022 2021 2020
(in millions) Gross Net Gross Net Gross Net
Asbestos and environmental:
Loss reserves, beginning of the year $ 63.8 $ 54.5 $ 59.3 $ 50.7 $ 52.6 $ 43.8
Incurred losses 13.2 10.5 17.4 14.7 20.2 17.4
Losses paid (11.5) (9.2) (12.9) (10.8) (13.5) (10.5)
Loss reserves - asbestos and environmental,
end of period 65.5 55.8 63.8 54.6 59.3 50.7
Risk-management reserves 144.6 91.5 162.6 99.2 162.4 100.5
Run-off reinsurance reserves 0.4 0.4 0.5 0.5 0.5 0.5
Other run-off lines 22.6 15.6 34.3 24.5 14.3 8.9
Total loss reserves - Run-off Lines
Losses and loss adjustment expenses for the year endedDecember 31, 2022 , included$2.9 million of net unfavorable loss reserve development on prior accident years. The unfavorable prior year loss development was due to$10.5 million in asbestos and environmental lines partially offset by$8.3 million net favorable loss reserve development in run-off liability losses excluding asbestos and environmental. The movement on asbestos and environmental lines was due to higher than expected loss activity and movement on large claims alleging environmental losses. The movement on liability exposures excluding asbestos and environmental was due to analysis of individual claims.
Losses and loss adjustment expenses for the year ended
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The following table represents the components of gross loss reserves for the Run-off Lines:
For the Years Ended December 31,
(in millions) 2022 2021 2020
Asbestos:
Direct
Case reserves $ 3.2 $ 3.0 $ 3.1
Unallocated loss adjustment expense ("ULAE") 0.5 0.5 0.5
Incurred but not reported ("IBNR") 17.4 19.9 20.2
Total direct written reserves 21.1 23.4 23.8
Assumed domestic
Case reserves 6.8 7.4 8.4
ULAE 0.8 0.8 0.8
IBNR 13.0 11.9 12.8
Total assumed domestic reserves 20.6 20.1 22.0
Assumed London
Case reserves 2.4 2.1 1.4
IBNR 2.6 2.3 1.6
Total assumed London reserves 5.0 4.4 3.0
Total asbestos reserves 46.7 47.9 48.8
Environmental reserves 18.8 15.9 10.5
Risk-management reserves 144.6 162.6 162.4
Run-off reinsurance reserves 0.4 0.5 0.5
Other run-off lines 22.6 34.3 14.3
Total loss reserves - Run-off Lines $
233.1
We perform an extensive actuarial analysis of the asbestos and environmental reserves on at least an annual basis. We continually monitor the status of the claims and may make adjustments outside the annual review period. The review entails a detailed analysis of our direct and assumed exposure. We consider the indications from the various actuarial methods from the review to determine our best estimate of the asbestos and environmental losses and loss adjustment expense reserves. We primarily relied on a method that projects future reported claims and severities, with some weight given to other methods. This method relies most heavily on our historical claims and severity information, whereas other methods rely more heavily on industry information. The method produces an estimate of IBNR losses based on projections of future claims and the average severity for those future claims. The severities were calculated based on our specific data and in our opinion best reflect our liabilities based upon the insurance policies issued.
The following table represents a reconciliation of the number of asbestos and environmental claims outstanding (in whole numbers):
For the Years Ended December 31,
2022 2021 2020
Open claims, beginning of the year 687 706
707
Claims closed during the year 63 67
119
Claims opened during the year 48 48
118
Open claims, end of the year 672 687
706
The following table represents gross payments on asbestos and environmental claims:
For the Years Ended December 31,
(in millions) 2022 2021 2020
Gross payments on closed claims$ 3.6 $ 2.9 $ 9.5 Gross payments on open claims 7.9 10.0 4.0 Total gross payments$ 11.5 $ 12.9 $ 13.5 74
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Because of the types of coverage within the Run-off Lines of business still being serviced by Argonaut, a significant amount of subjectivity and uncertainty exists in establishing the reserves for losses and loss adjustment expenses. Factors that increase these uncertainties are: (1) lack of historical data, (2) inapplicability of standard actuarial projection techniques, (3) uncertainties regarding ultimate claim costs, (4) coverage interpretations and (5) the judicial, statutory and regulatory environments under which these claims may ultimately be resolved. Significant uncertainty remains as to our ultimate liability due to the potentially long waiting period between exposure and emergence of any bodily injury or property damage and the resulting potential for involvement of multiple policy periods for individual claims. Due to these uncertainties, the current trends may not be indicative of future results. Although we have determined and recorded our best estimate of the reserves for losses and loss adjustment expenses for Run-off Lines, current judicial and legislative decisions continue to broaden liability, expand the scope of coverage and increase the severity of claims payments. As a result of these and other recent developments, the uncertainties inherent in estimating ultimate loss reserves are heightened, further complicating the already complex process of determining loss reserves. The industry as a whole is involved in extensive litigation over coverages and liability issues continue to make it difficult to quantify these exposures.
Underwriting, Acquisition and Insurance Expenses
Underwriting, acquisition and insurance expenses for the Run-off Lines segment consists primarily of administrative expenses.
Liquidity and Capital Resources
Our insurance and reinsurance subsidiaries require liquidity and adequate capital to meet ongoing obligations to policyholders and claimants and fund operating expenses. During the year endedDecember 31, 2022 , cash flow provided by operations was$53.2 million . Based on current premium volumes and other measures of capital deployed in our business, we determined we had excess capital and, therefore, returned capital to our shareholders through dividend payments to our shareholders. We believe our liquidity generated from operations and, if required, from our investment portfolio, will be sufficient to meet our obligations for at least the next 12 months. We believe we have access to various sources of liquidity including cash, investments and the ability to borrow under our revolving credit facility.
Cash Flows
The Company's future cash flows largely depend on the availability of dividends or other statutorily permissible payments from subsidiaries. The ability to pay such dividends is limited by the applicable laws and regulations of the various countries and states in which these subsidiaries operate, including, among others,Bermuda . The primary sources of our cash inflows are premiums, reinsurance recoveries, proceeds from sales and redemptions of investments and investment income. The primary cash outflows are claim payments, loss adjustment expenses, reinsurance costs, underwriting, acquisition and overhead expenses, purchases of investments, payment of common and preferred dividends and income taxes. Management believes that cash inflows are sufficient to cover cash outflows in the foreseeable future. We have access to additional sources of liquidity should the need for additional cash arise.
Our liquidity was not materially impacted by COVID-19 during 2021 and 2022. However, there can be no assurance that the pandemic will not cause further disruption to our business or the global economy in that time period.
Cash provided by operating activities can fluctuate due to timing differences in the collection of premiums and reinsurance recoveries and the payment of losses and expenses. For the years endedDecember 31, 2022 and 2021, cash provided by operating activities was$53.2 million and$99.7 million , respectively. The decrease in cash flows provided by operating activities in 2022 compared to 2021 was attributable to various fluctuations within our operating activities, and primarily related to the timing of reinsurance recoveries, claim payments and premium cash receipts in the respective periods. For the years endedDecember 31, 2022 and 2021, net cash used in investing activities was$26.6 million and$55.9 million , respectively. Net cash used in investing activities was mainly the result of the change in proceeds from fixed maturities, purchases of commercial mortgage loans, and foreign regulatory pools. This was offset primarily by reduced purchases of fixed maturities. Additionally, we received$14.9 million in net cash from the sale of Argo Seguros and AGSE.
For the years ended
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We invest excess cash in a variety of investment securities. As ofDecember 31, 2022 , our investment portfolio consisted of 73.3% fixed maturities, 4.3% commercial mortgage loans, 1.2% equity securities, 8.9% other investments 12.3% short-term investments (based on fair value) compared to 79.3% fixed maturities, 1.1% equity securities, 7.3% other investments and 12.3% short-term investments as ofDecember 31, 2021 . We classify the majority of our investment portfolio as available-for-sale; resulting in these investments being reported at fair market value with unrealized gains and losses, net of tax, being reported as a component of shareholders' equity. AtDecember 31, 2022 , no investments were designated as trading. No issuer (excluding United States Government and United States Governmental agencies) of fixed maturity or equity securities represents more than 2.7% of shareholders' equity atDecember 31, 2022 .
Reinsurance and Collateral Held by
We maintain a comprehensive reinsurance program at levels management considers
adequate to diversify risk and safeguard our financial position. Increases in
the costs of this program, or the failure of our reinsurers to meet their
obligations in a timely fashion, may have a negative impact on liquidity.
Under certain insurance programs (i.e., large deductible programs and surety
bonds) and various reinsurance agreements, collateral and letters of credit
("LOCs") are held for our benefit to secure performance of insureds and
reinsurers in meeting their obligations. At December 31, 2022 , the amount of
such collateral and LOCs held under insurance and reinsurance agreements was
$926.4 million and $1,299.3 million , respectively. Collateral can also be
provided in the form of trust accounts. As we are the beneficiary of these trust
accounts only to secure future performance, these amounts are not reflected in
our Consolidated Balance Sheets. Collateral provided by an insured or reinsurer
may exceed or fall below the amount of their total outstanding obligation.
On November 9, 2022 , the "U.S. LPT" with a wholly owned subsidiary of Enstar
Group Limited ("Enstar") covering a majority of the Company's U.S. casualty
insurance reserves, including construction, for accident years 2011 to 2019
closed. On the closing date, the Company transferred cash and investments to
Enstar a portion of which was deposited into a trust established to secure
Enstar's claim payment obligation to the Company. As such, our reinsurance
recoverable with Enstar is fully collateralized.
LOCs have been filed with Lloyd's by trade capital providers as part of the terms of whole account quota share reinsurance contracts entered into by the trade capital providers. In the event such LOCs are funded, the outstanding balance would be the responsibility of the trade capital providers.
During the year ended
Holding company and Intercompany Dividends
Argo Group and its other non-insurance company subsidiaries are dependent on dividends and other permitted payments from their insurance subsidiaries in order to pay cash dividends to their shareholders, for debt service and for their operating expenses. The ability of our insurance subsidiaries to pay dividends is subject to certain restrictions imposed by the jurisdictions of domicile that regulate these subsidiaries and each jurisdiction has calculations for the amount of dividends that our subsidiary can pay without the approval of the insurance regulator. Argo Re is the primary direct subsidiary ofArgo Group International Holdings, Ltd. and is subject toBermuda insurance laws. ArgoIreland is indirectly owned by Argo Re and is a mid-level holding company subject to Irish laws, and its primary subsidiary isArgo Group U.S., Inc. Argo Group U.S., Inc. is a mid-level holding company subject toDelaware laws.Argo Group U.S., Inc. is the parent of all of ourU.S. insurance subsidiaries. The payment of dividends by Argo Re is limited underBermuda insurance laws which require Argo Re to maintain certain measures of solvency and liquidity. As ofDecember 31, 2022 , the statutory capital and surplus of Argo Re was$1,024.9 million , and the amount required to be maintained was$100.0 million , thereby allowing Argo Re the potential to pay dividends or capital distributions within the parameters of the solvency and liquidity margins. We believe that the dividend and capital distribution capacity of Argo Re will provide us with sufficient liquidity to meet the operating and debt service commitments, as well as other obligations.
During 2022, Argo Re paid cash dividends of
During 2022,
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During 2022,Argo Group U.S., Inc. may be permitted to receive dividends from Argonaut up to$99.4 million without prior approval from theIllinois Division of Insurance .Argo Group U.S, Inc. may be permitted to receive dividends fromRockwood of up to$21.3 million without prior approval from thePennsylvania Department of Insurance during 2022. Business and regulatory considerations may impact the amount of dividends actually paid and prior approval of dividend payments may be required.
Revolving Credit Facility and Term Loan
OnNovember 2, 2018 , each ofArgo Group ,Argo Group US, Inc. ,Argo International Holdings Limited , andArgo Underwriting Agency Limited (the "Borrowers") entered into a$325 million credit agreement (the "Credit Agreement") withJPMorgan Chase Bank, N.A ., as administrative agent. The Credit Agreement includes a one-time borrowing of$125 million for a term loan (the "Term Loan"), and a$200 million revolving credit facility. The Company used most of the net proceeds from the Preferred Stock Offering (as defined in Note 11 "Shareholders' Equity") to pay off the Term Loan inSeptember 2020 . The Credit Agreement matures onNovember 2, 2023 . Borrowings under the Credit Agreement may be used for general corporate purposes, including working capital and permitted acquisitions, and each of the Borrowers has agreed to be jointly and severally liable for the obligations of the other Borrowers under the Credit Agreement. The Credit Agreement contains customary events of default. If an event of default occurs and is continuing, the Borrowers could be required to repay all amounts outstanding under the Credit Agreement. The lenders could also elect to accelerate the maturity of the loans and/or terminate the commitments under the Credit Agreement upon the occurrence and during the continuation of an event of default. No defaults or events of defaults have occurred as of the date of this filing. OnMarch 2, 2022 , the parties to the Credit Agreement entered into Amendment No. 1 to the Credit Agreement, which replaced Euro and Sterling LIBOR with the Euro Interbank Offered Rate ("EURIBOR") and the Sterling Overnight Index Average ("SONIA") as the interest rate benchmark for borrowings denominated in Euros and in Sterling, respectively. This amendment also sets forth provisions for fallback rates in the event that EURIBOR and SONIA are not available. The USD LIBOR benchmark interest rate was not replaced or affected by this amendment as USD LIBOR remains effective untilJune 2023 . OnJuly 15, 2022 , the parties to the Credit Agreement entered into Amendment No. 2, which revised the definition of "TangibleNet Worth " to exclude accumulated other comprehensive income (loss) shown on our Consolidated balance sheets. OnDecember 20, 2022 , the Borrowers and the lenders entered into Amendment No. 3 to the Credit Agreement. This amendment increased the revolving commitments from$200 million to$220 million , with the addition of a new lender. Other revisions to the Credit Agreement included a revision to the minimum tangible net worth requirement, permitting the sale ofArgo Underwriting Agency Limited and its subsidiaries in accordance with the Share Purchase Agreement dated as ofSeptember 8, 2022 betweenAIH andOhio Farmers Insurance Company and removing AIH and AUA as Borrowers from the Credit Agreement upon such sale, and updating the benchmark interest rate provisions to replace US LIBOR with Term SOFR.
Senior Notes
InSeptember 2012 ,Argo Group International Holdings, Ltd. (the "Parent Guarantor"), through its subsidiary Argo GroupU.S. (the "Subsidiary Issuer"), issued$143.8 million aggregate principal amount of the Subsidiary Issuer's 6.5% Senior Notes dueSeptember 15, 2042 (the "Notes"). The Notes are unsecured and unsubordinated obligations of the Subsidiary Issuer and rank equally in right of payment with all of the Subsidiary Issuer's other unsecured and unsubordinated debt. The Notes are guaranteed on a full and unconditional senior unsecured basis by the Parent Guarantor. The Notes may be redeemed, for cash, in whole or in part at the Subsidiary Issuer's option, at any time and from time to time, prior to maturity at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued but unpaid interest on the principal amount being redeemed to, but not including, the redemption date. 77
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Floating Rate Loan Stock
We assumed certain debt through the acquisition of Syndicate 1200. These notes are unsecured and unsubordinated. All are redeemable subject to certain terms and conditions at a price up to 100% of the principal plus accrued and unpaid interest. Interest on theU.S. Dollar and Euro notes is due semiannually and quarterly, respectively. These notes have been reclassified to liabilities held-for-sale. See Note 2, "Recent Acquisitions, Disposals & Other Transactions". A summary of the notes outstanding atDecember 31, 2022 is presented below: (in millions) Interest Rate at Currency Issue Date Maturity Rate Structure December 31, 2022 Amount U.S. Dollar 12/8/2004 11/15/2034 6 month LIBOR + 4.2% 7.26% $
6.5
U.S. Dollar 10/31/2006 1/15/2036 6 month LIBOR + 4.0% 7.06% 10.0 Total U.S. Dollar notes16.5 Euro 9/6/2005 8/22/2035 3 month Euribor + 4.0% 5.82%12.7 Euro 10/31/2006 11/22/2036 3 month Euribor + 4.0% 5.82%11.1 Euro 6/8/2007 9/15/2037 3 month Euribor + 3.9% 5.95% 14.4 Total Euro notes 38.2 Total notes outstanding$ 54.7 Trust Preferred Securities Through a series of trusts, that are wholly-owned subsidiaries (non-consolidated), we issued trust preferred securities. The interest on the underlying debentures is variable with the rates being reset quarterly and subject to certain interest rate ceilings. Interest payments are payable quarterly. The debentures are all unsecured and are subordinated to other indebtedness. All are redeemable subject to certain terms and conditions at a price equal to 100% of the principal plus accrued and unpaid interest. 78
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A summary of our outstanding junior subordinated debentures atDecember 31, 2022 is presented below: (in millions) Interest Rate at Issue Date Trust Preferred Pools Maturity Rate Structure December 31, 2022 AmountArgo Group 5/15/2003 PXRE Capital Statutory Trust II 5/15/2033 3M LIBOR + 4.10% 8.71%$ 18.0 11/6/2003 PXRE Capital Trust VI 9/30/2033 3M LIBOR + 3.90% 8.63% 10.3 Argo Group US 5/15/2003 Argonaut Group Statutory Trust 5/15/2033 3M LIBOR + 4.10% I 8.71% 15.5 12/16/2003 Argonaut Group Statutory Trust 1/8/2034 3M LIBOR + 4.10% III 8.18% 12.3 4/29/2004 Argonaut Group Statutory Trust 4/29/2034 3M LIBOR + 3.85% IV 8.50% 13.4 5/26/2004 Argonaut Group Statutory Trust 5/24/2034 3M LIBOR + 3.85% V 8.61% 12.4 5/12/2004 Argonaut Group Statutory Trust 6/17/2034 3M LIBOR + 3.80% VI 8.54% 13.4 9/17/2004 Argonaut Group Statutory Trust 12/15/2034 3M LIBOR + 3.60% VII 8.37% 15.5 9/22/2004 Argonaut Group Statutory Trust 9/22/2034 3M LIBOR + 3.55% VIII 8.30% 15.5 10/22/2004 Argonaut Group Statutory Trust 12/15/2034 3M LIBOR + 3.60% IX 8.37% 15.5 9/15/2005 Argonaut Group Statutory Trust 9/15/2035 3M LIBOR + 3.40% 8.17% X 30.9 Total Outstanding$ 172.7 Subordinated Debentures Unsecured junior subordinated debentures with a principal balance of$91.8 million were assumed through theFebruary 2017 acquisition ofMaybrooke Holdings, S.A. ("the acquired debt").The acquired debt is carried on our Consolidated Balance Sheets at$85.9 million , which represents the debt's fair value at the date of acquisition plus accumulated accretion of discount to par value, as required by accounting for business combinations under ASC 805. AtDecember 31, 2022 , the acquired debt was eligible for redemption at par. Interest accrues on the acquired debt based on a variable rate, which is reset quarterly. Interest payments are payable quarterly. A summary of the terms of the acquired debt outstanding atDecember 31, 2022 is presented below: (in millions) Interest Rate at Principal at Carrying Value
at
Issue Date Maturity Rate Structure December 31, 2022 December 31, 2022 December 31, 2022
9/13/2007 9/15/2037 3 month LIBOR + 3.15% 7.92 % $ 91.8 $ 85.9
Letter of Credit Facilities - Argo Re
Argo Re may be required to secure its obligations under various reinsurance contracts in certain circumstances. In order satisfy these requirements, Argo Re has entered into one committed and two uncommitted secured bilateral LOC facilities with commercial banks and generally uses these facilities to issue LOCs in support of non-admitted reinsurance obligations in theU.S. and other jurisdictions. The committed LOC facility has a term of one year and includes customary conditions and event of default provisions. The issuance of LOCs using the uncommitted LOC facilities is at the discretion of the lenders. The availability of letters of credit under these secured facilities are subject to a borrowing base requirement, determined on the basis of specified percentages of the market value of eligible categories of securities pledged to the lender. OnDecember 31, 2022 , committed and uncommitted LOC facilities totaled$205 million . OnDecember 31, 2022 , LOCs totaling$135.1 million were outstanding, of which$50.2 million were issued against the committed secured bilateral LOC facility and$84.9 million were issued by commercial banks against the uncommitted, secured bilateral LOC facilities. Collateral with a market value of$169.8 million was pledged to these banks as security against these LOCs. In addition to the bilateral, secured letters of credit facilities described above, Argo Re can use other forms of collateral to secure these reinsurance obligations including trust accounts, cash deposits, LOCs issued by commercial banks on an uncommitted basis and the Credit Agreement. 79
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OnJune 22, 2022 , we posted collateral in a form of a$50.0 million letter of credit under the terms of theMalta sales agreement. The letter of credit is subject to reimbursement by Argo in the event of a drawdown.
Other Letters of Credit
InNovember 2021 ,Argo Group executed a LOC facility with a commercial bank to issue LOCs in favor of Lloyd's to support its Funds at Lloyd's requirements. This facility has an initial term of one year, and is unsecured, renewable and includes customary conditions and event of default provisions. An LOC in the amount of £26 million ($35.1 million ) was issued in favor of Lloyd's. Argo replaced the FAL LOC with other collateral inDecember 2022 , and requested cancellation of the FAL LOC by Lloyds due to the sale ofArgo Underwriting Agency Limited and its subsidiaries in accordance with the Share Purchase Agreement dated as ofSeptember 8, 2022 betweenAIH andOhio Farmers Insurance . Lloyds cancelled the LOC effectiveDecember 5, 2022 , and the facility was subsequently terminated inJanuary 2023 .
Other LOCs issued and outstanding on
Preferred Stock Offering
OnJuly 9, 2020 , the Company issued 6,000 shares of its Series A Preference Shares (equivalent to 6,000,000 depositary shares, each representing a 1/1,000th interest in a Series A Preference Share) with a$25,000 liquidation preference per share (equivalent to$25 per depositary share) (the "Preferred Stock Offering"). Net proceeds from the sale of the depositary shares were approximately$144 million after deducting underwriting discounts and estimated offering expenses payable by the Company. The Company used most of the net proceeds to repay its term loan, which had$125 million principal outstanding, and used the remainder of the proceeds for working capital to support continued growth in insurance operations. Dividends to the Series A Preferences Shares will be payable on a non-cumulative basis only when, as and if declared by our Board or a duly authorized committee thereof, quarterly in arrears on the 15th of March, June, September, and December of each year, commencing onSeptember 15, 2020 , at a rate equal to 7.00% of the liquidation preference per annum (equivalent to$1,750 per Series A Preference Share and$1.75 per depositary share per annum) up to but excludingSeptember 15, 2025 . Beginning onSeptember 15, 2025 , any such dividends will be payable on a non-cumulative basis, only when, as and if declared by our Board or a duly authorized committee thereof, during each reset period, at a rate per annum equal to the Five-YearU.S. Treasury Rate as of the most recent reset dividend determination date (as described in the Company's prospectus supplement datedJuly 7, 2020 ) plus 6.712% of the liquidation preference per annum. For the year endedDecember 31, 2022 , the Board declared quarterly dividends in the aggregate amount of$1,750 per preferred share. Cash dividends paid for the year endedDecember 31, 2022 totaled$10.5 million .
Argo Group Common Shares and Dividends
For the year endedDecember 31, 2022 , the Board declared quarterly dividends in the aggregate amount of$1.24 per share. Cash dividends paid for the year endedDecember 31, 2022 totaled$43.4 million . OnFebruary 8, 2023 , Company entered into a definitive agreement and plan of merger (the "Merger Agreement") with Brookfield Reinsurance Ltd. ("Brookfield Reinsurance") andBNRE Bermuda Merger Sub Ltd. , a wholly owned subsidiary of Brookfield Reinsurance ("Merger Sub"). As part of the Merger Agreement, the Company has agreed to suspend any dividends that would otherwise be declared and paid on the Company Shares during the period from the date of the Merger Agreement through the earlier of the closing of the transaction or the termination of the Merger Agreement. See Note 23, "Subsequent Events" for further information. OnMay 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. As ofDecember 31, 2022 , availability under the 2016 Repurchase Authorization for future repurchases of our common shares was$53.3 million .
We did not repurchase any common shares for the twelve months ended
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Cash Obligations and Commitments
Our estimated contractual obligations and commitments as of
Payments Due by Period
Less Than 1
(in millions) Total Year 1 - 3 Years Thereafter
Long-term debt:
Junior subordinated debentures (1) $ 542.4 $ 22.1 $ 66.4 $ 453.9
Senior unsecured fixed rate notes (2) 326.0 9.3 28.0 288.7
Operating leases 77.0 10.9 28.4 37.7
Purchase obligations (3) 12.0 8.0 4.0 -
Other long-term liabilities:
Claim payments (4) 5,051.6 1,538.6 1,830.0 1,683.0
Partnership commitments (5) 108.9 108.9 - -
Total contractual obligations $ 6,117.9 $ 1,697.8 $ 1,956.8 $ 2,463.3 (1) Interest only on Junior Subordinated Debentures through 2037. Interest
calculated based on the rate in effect at
(2) Interest only on Senior Unsecured Fixed Rate Notes through 2042. Interest
calculated based on the rate in effect at
(3) Purchase obligations consist primarily of software, hardware and equipment servicing and software licensing fees.
(4) Claim payments do not have a contractual maturity; exact timing of claim payments cannot be predicted with certainty. The above table estimates timing of claim payments based on historical payment patterns and excludes the benefits of reinsurance recoveries.
(5)
Financial Statement of Subsidiary Issuer
As discussed above, the Parent Guarantor, through its Subsidiary Issuer, issued$143.8 million aggregate principal amount of the Notes. In accordance with Article 10 of SEC Regulation S-X, we have elected to present condensed consolidating financial information in lieu of separate financial statements for the Subsidiary Issuer. The following tables present condensed consolidating financial information atDecember 31, 2022 and for the year endedDecember 31, 2022 , of the Parent Guarantor and the Subsidiary Issuer. The Subsidiary Issuer is an indirect wholly-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor's investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees certain of the debt of the Subsidiary Issuer. Condensed consolidating financial information of the Subsidiary Issuer is presented on a consolidated basis and consists principally of the net assets and results of operations of operating insurance company subsidiaries. 81
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CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2022
(in millions)
Argo Group
Argo Group U.S., Inc. Other
International and Subsidiaries Subsidiaries
Holdings, Ltd (Subsidiary and Consolidating
(Parent Guarantor) Issuer) Eliminations (1) Adjustments (2) Total
Assets
Investments $ 1.8 $ 3,093.9 $ 556.2 $ - $ 3,651.9
Cash 5.2 14.5 30.5 - 50.2
Accrued investment income - 16.8 1.8 - 18.6
Premiums receivable - 235.7 56.3 - 292.0
Reinsurance recoverables - 2,301.9 727.2 - 3,029.1
Goodwill - 118.6 - - 118.6
Current income taxes receivable, net - 43.9 1.0 - 44.9
Deferred tax assets, net - 101.2 - - 101.2
Deferred acquisition costs, net - 109.4 (2.4) - 107.0
Ceded unearned premiums - 273.2 102.3 - 375.5
Operating lease right-of-use assets 4.6 52.5 0.6 - 57.7
Other assets 6.7 87.2 27.6 - 121.5
Assets held-for-sale - - 2,066.2 - 2,066.2
Intercompany notes receivable - 73.3 (73.3) - -
Investments in subsidiaries 1,281.7 - - (1,281.7) -
Total assets $ 1,300.0 $ 6,522.1 $ 3,494.0 $ (1,281.7) $ 10,034.4
Liabilities and Shareholders' Equity
Reserves for losses and loss adjustment
expenses $ - $ 4,032.3 $ 1,019.3 $ - $ 5,051.6
Unearned premiums - 893.4 146.5 - 1,039.9
Ceded reinsurance payable, net - 103.8 54.9 - 158.7
Funds held - 75.2 (25.2) - 50.0
Debt 28.4 284.8 85.9 - 399.1
Accrued underwriting expenses and other
liabilities 10.0 99.4 11.9 - 121.3
Operating lease liabilities 4.6 61.1 0.7 - 66.4
Liabilities held-for-sale - - 1,914.5 - 1,914.5
Due to (from) affiliates 14.0 (10.1) 10.1 (14.0) -
Intercompany notes payable 10.1 - (10.1) -
Total liabilities 67.1 5,539.9 3,208.5 (14.0) 8,801.5
Total shareholders' equity 1,232.9 982.2 285.5 (1,267.7) 1,232.9
Total liabilities and shareholders' equity $ 1,300.0
(1)Includes all other subsidiaries of
(2)Includes all
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CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2022
(in millions)
Argo Group Argo Group
International U.S., Inc. Other
Holdings, Ltd and Subsidiaries Subsidiaries
(Parent (Subsidiary and Consolidating
Guarantor) Issuer) Eliminations (1) Adjustments (2) Total
Premiums and other revenue:
Earned premiums $ - $ 1,202.1 $ 538.3 $ - $ 1,740.4
Net investment income - 122.7 7.1 - 129.8
Net investment and other gains (losses) - (41.7) (73.6) - (115.3)
Total revenue - 1,283.1 471.8 - 1,754.9
Expenses:
Losses and loss adjustment expenses - 870.3 296.6 - 1,166.9
Underwriting, acquisition and insurance expenses (0.6) 462.8 208.5 - 670.7 Non-operating expenses 26.2 15.9 9.4 - 51.5 Interest expense 1.6 17.9 7.3 - 26.8 Fee and other (income) expense, net - (0.1) (1.2) -
(1.3)
Foreign currency exchange losses - (0.2) (4.8) -
(5.0)
Impairment of goodwill and intangible assets - - 28.5 - 28.5 Total expenses 27.2 1,366.6 544.3 - 1,938.1 (Loss) income before income taxes (27.2) (83.5) (72.5) - (183.2) Provision for income taxes - (14.9) 6.9 - (8.0) Net (loss) income before equity in earnings of subsidiaries (27.2) (68.6) (79.4) -
(175.2)
Equity in undistributed earnings of subsidiaries (148.0) - - 148.0 - Net income (loss)$ (175.2) $ (68.6) $ (79.4) $ 148.0$ (175.2) Dividends on preferred shares 10.5 - - -
10.5
Net income (loss) attributable to common shareholders$ (185.7) $ (68.6) $ (79.4) $ 148.0$ (185.7)
(1)Includes all other subsidiaries of
(2)Includes all
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Recent Accounting Pronouncements
We have evaluated recently issued accounting pronouncements and none are material to our results of operations or financial position reported herein.
Critical Accounting Estimates
Reserves for Losses and Loss Adjustment Expenses
We establish reserves for the estimated total unpaid costs of losses including
loss adjustment expenses ("LAE"), for claims that have been reported as well as
claims that have been incurred but not yet reported. Unless otherwise specified
below, the term "loss reserves" encompasses reserves for both losses and LAE.
Loss reserves reflect management's best estimate. Loss reserves established are
not an exact calculation of our liability. Rather, loss reserves represent
management's best estimate of our liability based on application of actuarial
techniques and other projection methodologies and taking into consideration
other facts and circumstances known at the balance sheet date. The process of
establishing loss reserves is complex and necessarily imprecise, as it involves
using judgment that is impacted by many internal and external variables such as
past loss experience, current claim trends and the prevailing social, economic
and legal environments. In determining loss reserves, we give careful
consideration to all available data and applicable actuarial analyses including
expected loss ratios, loss development factors, settlement patterns and the
weighting of actuarial methodologies.
The relevant factors and methodologies used to estimate loss reserves vary
significantly by product line due to differences in loss exposure and claim
complexity. Much of our business is underwritten on an occurrence basis, which
can lead to a significant time lag between the event that gives rise to a claim
and the date on which the claim is reported to us. Additional time may be
required to resolve the claim once it is reported to us. During these time lags,
which can span several years for complex claims, new facts and information
specific to the claim become known to us. In addition, general econometric and
societal trends including inflation may change. Any one of these factors may
require us to refine our loss reserve estimates on a regular basis. We apply a
strict regimen to assure that review of these facts and trends occurs on a
timely basis so that this information can be factored into our estimate of
future liabilities. However, due to the number and potential magnitude of these
variables, actual paid losses in future periods may differ materially from our
estimates as reflected in current reserves. These differences can be favorable
or unfavorable. A more precise estimation of loss reserves is also hindered by
the effects of growth in a line of business and uncertainty as to how new
business performs in relation to expectations established through analysis of
the existing portfolio. In addition to reserving for known claim events, we also
establish loss reserves for IBNR. Loss reserves for IBNR are set using our
actuarial estimates for events that have occurred as of the balance sheet date
but have not yet been reported to us. Estimation of IBNR loss reserves is
subject to significant uncertainty.
The following is a summary of gross and net loss reserves we recorded by line of business:
December 31, 2022 December 31, 2021
(in millions) Gross Net Gross Net
Property $ 593.1 $ 94.8 $ 876.4 $ 300.6
Liability 3,365.3 1,626.2 3,362.7 2,069.0
Professional 974.3 445.3 857.7 474.2
Specialty 118.9 46.8 498.2 279.4
Total reserves (1)
(1) At
Loss Reserve Estimation Methods
The process for estimating our loss reserves begins with the collection and
analysis of claim data. The data collected for actuarial analyses includes
reported claims, paid losses and case reserve estimates sorted by the year the
loss occurred. The data sets are sorted into homogeneous groupings, exhibiting
similar loss and exposure characteristics. We primarily use internal data in the
analysis but also consider industry data in developing factors and estimates. We
analyze loss reserves on a quarterly basis.
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We use a variety of actuarial techniques and methods to determine loss reserves
for all lines of business. Each method has its own set of assumptions, and each
has strengths and weaknesses depending on the exposures being evaluated. Since
no single estimation method is superior to another method in all situations, the
methods and assumptions used to project loss reserves will vary by line of
business and, when appropriate, by where we attach on a risk. We use what we
believe to be the most appropriate set of actuarial methods and assumptions for
each product line grouping. While the loss projection methods may vary by
product line, the general approach for calculating IBNR remains the same:
ultimate losses are forecasted first, and that amount is reduced by the amount
of cumulative paid claims and case reserves.
When we initially establish IBNR reserves at the beginning of an accident year
for each line of business, we often use the expected loss ratio method. This
method is based upon our analyses of historical loss ratios incorporating
adjustments for pricing changes, anticipated loss ratio trends, changes in mix
of business and any other factors that may impact loss ratio expectations. At
the end of each quarter, we review the loss ratio selections and the emerged
loss experience to determine if deviating from the loss ratio method is
appropriate. In general, we continue to use the loss ratio method until we deem
it appropriate to begin to rely on the experience of the accident year ("AY")
being evaluated. This weighing in of the AY experience is typically done by
employing the Bornhuetter-Ferguson ("BF") reserving methodology. The BF methods
compute IBNR through a blend of the expected loss ratio method and traditional
loss development methods. The BF methods estimate IBNR for an accident year as
the product of expected losses (earned premium multiplied by an expected loss
ratio) and an expected percentage of unreported losses. The expected percentage
of unreported losses is derived from age-to-ultimate loss development factors
that result from our analyses of loss development triangles. As accident years
mature to the point at which the reported loss experience is more credible, we
assign increasing weight to the paid and incurred loss development methods.
For short-tail lines of business such as property, we generally defer to the AY
loss experience more quickly as the time from claim occurrence to reporting is
generally short. In the event there are large claims incurred, we will analyze
large loss information separately to ensure that the loss reserving methods
appropriately recognize the magnitude of these losses in the evaluation of
ultimate losses.
For long-tail lines such as general liability and automobile liability, the loss
experience is not deemed fully credible for several years. At the end of the
accident year, we rely primarily on the BF methods and continue to rely on those
methods for several years. We assign greater weight to the paid and incurred
development methods as the data matures.
Workers compensation is also a long-tail line of business, and is reserved for
in keeping with other long-tailed business. However, a portion of the
outstanding reserves correspond to scheduled indemnity payments and are not
subject to extreme volatility. The portion of reserves that is not scheduled or
annuitized is subject to potentially large variations in ultimate loss cost due
to the uncertainty of medical cost inflation. Sources of medical cost inflation
include increased use, new and more expensive medical testing procedures and
prescription drugs costs.
We have a Run-off Lines segment that includes reserves for asbestos,
environmental and other latent exposures. These latent exposures are typically
characterized by extended periods of time between the dates an insured is first
exposed to a loss, a claim is reported and the claim is resolved. For our
Run-off Lines segment long-tail loss reserves, there is significant uncertainty
involved in estimating reserves for asbestos, environmental and other latent
injury claims. We use several methods to estimate reserves for these claims
including an approach that projects future calendar period claims and average
claim costs, a report year method which estimates loss reserves based on the
pattern and magnitude of reported claims and ground-up analysis that relies on
an evaluation of individual policy terms and conditions. We also consider
survival ratio and market share methods which compare our level of loss reserves
and loss payments to that of the industry for similar exposures. We apply
greatest weight to the method that projects future calendar period claims and
average claim costs because we believe it best captures the unique claim
characteristics of our underlying exposures and loss development potential. We
perform a full review of our Run-off Lines asbestos, environmental and other
latent exposures loss reserves at least once a year and review loss activity
quarterly for significant changes that might impact management's best estimate.
Each business segment is analyzed individually, with development characteristics
for each short-tail and long-tail line of business identified and applied
accordingly. In comparing loss reserve methods and assumptions used at
December 31, 2022 as compared with methods and assumptions used at December 31,
2021 , management has not changed or adjusted methodologies or assumptions in any
significant manner.
In conducting our actuarial analyses, we generally assume that past patterns
demonstrated in the data will repeat themselves and that the data provides a
basis for estimating future loss reserves. In the event that we become aware of
a material change that may render past experience inappropriate for the purpose
of estimating current loss reserves, we will attempt to quantify the effect of
the change and use informed management judgment to adjust loss reserve forecasts
appropriately.
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Uncertainties in Loss Reserve Estimation
The causes of uncertainty will vary for each product line reviewed. For short-tail property lines of business, we are exposed to catastrophe losses, both natural and man-made. Due to the nature of certain catastrophic loss events, such as hurricanes, earthquakes or terrorist attacks, our normal claims resolution processes may be impaired due to factors such as difficulty in accessing impacted areas and other physical, legal and regulatory impediments. These factors can make establishment of accurate loss reserve estimates difficult and render such estimates subject to greater uncertainty. Additionally, if the catastrophe occurs near the end of a financial reporting period, there are additional uncertainties in loss reserve estimates due to the lack of sufficient time to conduct a thorough analysis. Long-tail casualty lines of business also present challenges in establishing appropriate loss reserves, for example if changes in the legal environment occur over time which broaden our liability or scope of policy coverage and increase the magnitude of claim payments. In all lines, final claim payments may differ from the established loss reserve. Due to the uncertainties discussed above, the ultimate losses may vary materially from current loss reserves and could have a material adverse or beneficial effect on our future financial condition, results of operations and cash flows. Any adjustments to loss reserves are reflected in the results for the year during which the adjustments are made. In addition to the previously described general uncertainties encountered in estimating loss reserves, there are significant additional uncertainties in estimating the amount of our potential losses from asbestos and environmental claims. Loss reserves for asbestos and environmental claims normally cannot be estimated with traditional loss reserving techniques that rely on historical accident year development factors due to the uncertainties surrounding these types of claims. Among the uncertainties impacting the estimation of such losses are:
•potentially long waiting periods between exposure and emergence of any bodily injury or property damage;
•difficulty in identifying sources of environmental or asbestos contamination and in properly allocating responsibility and/or liability for damage;
•changes in underlying laws and judicial interpretation of those laws;
•potential for an environmental or asbestos claim to involve many insurance providers over many policy periods;
•long reporting delays from insureds to insurance companies;
•historical data concerning asbestos and environmental losses which is more limited than historical information on other types of claims;
•questions concerning interpretation and application of insurance coverage; and
•uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure.
Case reserves and expense reserves for costs of related litigation have been established where sufficient information has been developed. Additionally, IBNR has been established to cover additional exposure on known and unknown claims. We underwrite environmental and pollution coverage on a limited number of policies and underground storage tanks. We establish loss reserves to the extent that, in the judgment of management, the facts and prevailing law reflect an exposure for us.
Risk Factors by Line of Business in Loss Reserve Estimation
The following section details reserving considerations and loss and LAE risk
factors for the lines representing most of our loss reserves. Each risk factor
presented will have a different impact on required loss reserves. Also, risk
factors can have offsetting or compounding effects on required loss reserves.
For example, introduction and approval of a more expensive medical procedure may
result in higher estimates for medical costs. But in the workers compensation
context within Liability lines, the availability of that same medical procedure
may enable workers to return to work more quickly, thereby lowering estimates
for indemnity costs for that line of business. As a result, it usually is not
possible to identify and measure the impact that a change in one discrete risk
factor may have or construct a meaningful sensitivity expectation around it. We
do not make explicit estimates of the impact on loss reserve estimates for the
assumptions related to the risk factors described below.
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Loss adjustment expenses used in connection with our loss reserves are comprised of both allocated and unallocated expenses. Allocated loss adjustment expenses generally relate to specific claim files. We often combine allocated loss adjustment expenses with losses for purposes of projecting ultimate liabilities. For some types of claims, such as asbestos, environmental, professional liability, and construction defect, allocated loss adjustment expenses consisting primarily of legal defense costs may be significant, sometimes exceeding the liability to indemnify claimants for losses. Unallocated loss adjustment expenses generally relate to the administration and handling of claims in the ordinary course of business. We typically calculate unallocated loss adjustment expense reserves using a percentage of unpaid losses for each line of business. Liability - General Liability General liability within Liability lines is considered a long-tail line, as it takes a relatively long period of time to finalize and resolve all claims from a given accident year. The speed at which claims are received and then resolved is a function of the specific coverage provided, jurisdiction in which the claim is located and specific policy provisions. There are numerous components underlying the general liability product line. Some of these have relatively moderate payout patterns with most of the claims for a given accident year closed within five to seven years, while others, including claims alleging construction defect, are characterized by extreme time lags for both reporting and payment of claims. In addition, this line includes asbestos and environmental claims, which are reviewed separately because of the unique character of these exposures. Allocated loss adjustment expenses in this line consist primarily of legal costs and may exceed the total amount of the indemnity loss on some claims. Major factors contributing to uncertainty in loss reserve estimates for general liability include reporting lags (i.e., the length of time between the event triggering coverage and the actual reporting of the claim), the number of parties involved in the underlying tort action, events triggering coverage that are spread over multiple time periods, the inability to know in advance what actual indemnity costs will be associated with an individual claim, the potential for disputes over whether claims were reasonably foreseeable and intended to be covered at the time the contracts were underwritten and the potential for mass tort claims and class actions. Generally, claims with a longer reporting lag time are characterized by greater inherent risk of uncertainty. Examples of loss and LAE risk factors associated with general liability claims that can change over time and result in adjustments to loss reserves include, but are not limited to, the following: Claims risk factors: •Changes in claim handling procedures; •Changes in policy provisions or court interpretation of such provisions; •New or expanded theories of liability; •Trends in jury awards; •Changes in the propensity to sue, in general and with specificity to particular issues; •Changes in statutes of limitations; •Changes in the underlying court system; •Changes in tort law; •Frequency of visits to health care providers; •Types of medical treatments received; •Shifts in law suit mix betweenU.S. federal and state courts; and •Changes in inflation. Book of Business risk factors: •Changes in policy provisions (e.g., deductibles, policy limits, endorsements); •Changes in underwriting standards; and •Product mix (e.g., size of account, class, industries insured, jurisdiction mix).
Liability - Workers Compensation
Workers compensation within Liability lines is generally considered a long-tail
coverage as it takes a relatively long period of time to finalize claims from a
given accident year. Certain payments, such as initial medical treatment or
temporary wage replacement for the injured worker, are generally disbursed
quickly. Other payments may be made over the course of several years, such as
awards for permanent partial injuries. Some payments continue to take place
throughout the injured worker's life, such as permanent disability benefits and
on-going medical care. Although long-tail in nature, claims generally are not
subject to long reporting lags, settlements are generally not complex and most
of the liability exposure is characterized by high frequency and moderate
severity. The largest reserve risks are generally associated with low frequency,
high severity claims that require lifetime coverage for medical expense arising
from a worker's injury.
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Examples of loss and LAE risk factors that can change over time and cause workers compensation loss reserves to fluctuate include, but are not limited to, the following:
Indemnity claims risk factors: •Time required to recover from the injury; •Degree of available transitional jobs; •Degree of legal involvement; •Changes in the interpretations and processes of the workers compensation commissions' oversight of claim; •Future wage inflation forU.S. states that index benefits; •Changes in the administrative policies of second injury funds; and •Changes in benefit levels. Medical claims risk factors: •Changes in the cost of medical treatments, including prescription drugs, and underlying fee schedules; •Frequency of visits to health providers; •Number of medical procedures given during visits to health providers; •Types of health providers used; •Type of medical treatments received; •Use of preferred provider networks and other medical cost containment practices; •Availability of new medical processes and equipment; •Changes in life expectancy; •Changes in the use of pharmaceutical drugs; and •Degree of patient responsiveness to treatment. Book of Business risk factors: •Injury type mix; •Changes in underwriting standards; and •Changing product mix based on insured demand.
Liability - Commercial Automobile Liability
The commercial automobile liability product line within Liability lines is a
long-tail coverage, mainly due to exposures arising out of bodily injury
claims. Losses in this line associated with bodily injury claims generally are
more difficult to accurately estimate and take longer to resolve. Claim
reporting lags also can occur. Examples of loss and LAE risk factors that can
change over time and result in adjustments to commercial automobile liability
loss reserves include, but are not limited to, the following:
Claims risk factors:
•Trends in jury awards;
•Changes in the underlying court system;
•Changes in case law;
•Litigation trends;
•Subrogation opportunities;
•Changes in claim handling procedures;
•Frequency of visits to health providers;
•Types of medical treatments received;
•Changes in cost of medical treatments; and
•Degree of patient responsiveness to treatment.
Book of Business risk factors:
•Changes in policy provisions (e.g., deductibles, policy limits, endorsements,
etc.);
•Changes in mix of insured vehicles;
•Changes in underwriting standards;
•Gasoline prices; and
•Changes in macroeconomic factors including but not limited to unemployment
statistics.
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Professional
Professional, including errors and omissions and directors and officers coverages, is considered a long-tail line, as it takes a relatively long period of time to finalize and resolve all claims from a given year. The speed at which claims are received and then resolved is a function of the specific coverage provided, jurisdiction in which the claim is located and specific policy provisions. There are numerous components underlying the Professional line. Some of these have relatively moderate payout patterns (such as primary coverage written on a claims-made basis) with most of the claims for a given year closed within five to seven years. Others, including business written on an excess basis, can be characterized by longer time lags for payment of claims. Allocated loss adjustment expenses in this line consist primarily of legal costs and may exceed the total amount of the indemnity loss on some claims. Examples of loss and LAE risk factors associated with Professional claims that can change over time and result in adjustments to loss reserves include, but are not limited to, the following: Claims risk factors: •Changes in claim handling procedures; •Changes in policy provisions or court interpretation of such provisions; •New or expanded theories of liability; •Trends in jury awards; •Changes in the propensity to sue, in general and with specificity to particular issues; •Changes in statutes of limitations; •Changes in the underlying court system, including potential impacts from shutdowns associated with COVID-19; •Changes in tort law; •Fluctuations in stock prices; •Lawsuit abuse and third-party litigation finance; •Changes in the propensity to litigate rather than settle a claim; •Shifts in lawsuit mix betweenU.S. federal and state courts; and •Changes in inflation. Book of Business risk factors: •Changes in policy provisions (e.g., deductibles, policy limits, endorsements); •Changes in underwriting standards; and •Product mix (e.g., size of account, class, industries insured, jurisdiction mix). Specialty Specialty, including marine and surety coverages, is considered a shorter-tail line as claims are generally known relatively quickly. However, it can take a longer period of time to finalize and resolve all claims from a given year for lines such as surety within Specialty lines. Examples of loss and LAE risk factors associated with Specialty claims that can change over time and result in adjustments to loss reserves include, but are not limited to, the following: Claims risk factors: •Changes in claim handling procedures; •Changes in policy provisions or court interpretation of such provisions; •Changes in the economy; and •Changes in inflation. Book of Business risk factors: •Incidence of catastrophes; •Changes in policy provisions (e.g., deductibles, policy limits, endorsements); •Changes in underwriting standards; and •Product mix (e.g., size of account, class, industries insured, jurisdiction mix). Property Property is considered a short-tail line as claims are generally known quickly and resolved in a short period of time. However, the time to resolve a claim can be longer when the claim involves more difficult to resolve components such as business interruption losses or when the business is written on an excess basis. Examples of loss and LAE risk factors associated with Property claims that can change over time and result in adjustments to loss reserves include, but are not limited to, the following: 89
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Claims risk factors: •Changes in claim handling procedures; •Changes in the cost of building materials; •Changes in the cost of labor available to repair damages; •Disruptions to the supply chain; •Demand surge related to catastrophe events; •Changes in policy provisions or court interpretation of such provisions; and •Changes in inflation. Book of Business risk factors: •Incidence of catastrophes; •Geographical concentration of risks; •Changes in policy provisions (e.g., deductibles, policy limits, endorsements); •Changes in underwriting standards; and •Product mix (e.g., size of account, class, industries insured, jurisdiction mix).
Impact of changes in key assumptions on reserve volatility
We estimate reserves using a variety of methods, assumptions and data elements. The reserve estimation process includes explicit assumptions about a number of factors in the internal and external environment. Across most lines of business, the most important assumptions are future loss development factors applied to paid or reported losses to date. The trend in loss costs is also a key assumption, particularly in the most recent accident years, where loss development factors are less credible. The following discussion includes disclosure of possible variations from current estimates of loss reserves due to a change in certain key assumptions. Each of the impacts described below is estimated individually, without consideration for any correlation among other key assumptions or among lines of business. Therefore, it could be misleading to take each of the amounts described below and add them together in an attempt to estimate volatility for reserves in total. The estimated variations in reserves due to changes in key assumptions discussed below are a reasonable estimate of possible variations that may occur in the future, likely over a period of several calendar years. It is important to note that the variations discussed herein are not exhaustive and are not meant to be a worst or best case scenario, and therefore, it is possible that future variations may be more than amounts discussed below. Recorded gross reserves for Liability were$3,365.3 million , with approximately 2% of that amount related to run-off asbestos and environmental exposures as ofDecember 31, 2022 . For Liability losses relating to ongoing operations, loss development patterns are a key assumption for this line of business. Historically, assumptions on loss development patterns have been impacted by, among other things, changes in inflation, and emergence of new types of claims (e.g., construction defect claims) or a shift in the mixture between smaller, more routine claims and larger, more complex claims. We have reviewed the historical variation in loss development patterns for Liability losses deriving from continuing operations. If the incurred loss development patterns change by 20%, a change that we have experienced in the past and that management considers possible, the estimated net reserve could change by$175.0 million , in either direction. With respect to asbestos and environmental general liability losses, we wrote several different categories of insurance contracts that may cover asbestos and environmental claims. First, we wrote primary policies providing the first layer of coverage in an insured's general liability insurance program. Second, we wrote excess policies providing higher layers of general liability insurance coverage for losses that exhaust the limits of underlying coverage. Third, we acted as a reinsurer assuming a portion of those risks from other insurers underwriting primary, excess and reinsurance coverage. Fourth, we participated in the London Market, underwriting both direct insurance and assumed reinsurance business. With regard to both environmental and asbestos claims, significant uncertainty limits the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related expenses. Traditional actuarial reserving techniques cannot reasonably estimate the ultimate cost of these claims, particularly during periods where theories of law are in a state of continued uncertainty. The degree of variability of reserve estimates for these types of exposures is significantly greater than for other more traditional general liability exposures, and as such, we believe there is a high degree of uncertainty inherent in the estimation of asbestos and environmental loss reserves. 90
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In the case of the reserves for asbestos exposures, factors contributing to the high degree of uncertainty include inadequate loss development patterns, plaintiffs' expanding theories of liability, the risks inherent in major litigation and inconsistent emerging legal outcomes. Furthermore, over time, insurers, includingArgo Group , have experienced significant changes in the rate at which asbestos claims are brought, claims experience of particular insureds and value of claims, making predictions of future exposure from past experience uncertain. For example, in the past, insurers in general, includingArgo Group , have experienced an increase in the number of asbestos-related claims due to, among other things, plaintiffs' increased focus on new and previously peripheral defendants and an increase in the number of insureds seeking bankruptcy protection as a result of asbestos-related liabilities. Plaintiffs and insureds have sought to use bankruptcy proceedings, including "pre-packaged" bankruptcies, to accelerate the funding and amount of loss payments by insurers. In addition, some policyholders continue to assert new classes of claims for coverage to which an aggregate limit of liability may not apply. Further uncertainties include insolvencies of other insurers and reinsurers, delays in the reporting of new claims by insurers and reinsurers and unanticipated issues influencing our ability to recover reinsurance for asbestos and environmental claims. Management believes these issues are not likely to be resolved in the near future.
In the case of the reserves for environmental exposures, factors contributing to the high degree of uncertainty include expanding theories of liability and damages, the risks inherent in major litigation, inconsistent decisions concerning the existence and scope of coverage for environmental claims and uncertainty as to the monetary amount being sought by the claimant from the insured.
The reporting pattern for assumed reinsurance claims, including those related to asbestos and environmental claims is much longer than for direct claims. In many instances, it takes months or years to determine that the policyholder's own obligations have been met and how the reinsurance in question may apply to such claims. The delay in reporting reinsurance claims and exposures adds to the uncertainty of estimating the related reserves. The factors discussed above affect the variability of estimates for asbestos and environmental reserves including assumptions with respect to the frequency of claims, average severity of those claims settled with payment, dismissal rate of claims with no payment and expense to indemnity ratio. The uncertainty with respect to the underlying reserve assumptions for asbestos and environmental adds a greater degree of variability to these reserve estimates than reserve estimates for more traditional exposures. While this variability is reflected in part in the size of the range of reserves we have developed, that range may still not be indicative of the potential variance between the ultimate outcome and the recorded reserves. The process of estimating asbestos and environmental reserves, which is detailed in Note 8, "Run-off Lines," of Notes to Consolidated Financial Statements, remains subject to a wide variety of uncertainties. Due to these uncertainties, further developments could cause us to change our estimates and ranges of our asbestos and environmental reserves, and the effect of these changes could be material to our consolidated operating results, financial condition and liquidity. Similar to Liability, Professional reserves are affected by loss development pattern assumptions. Historically, assumptions on loss development patterns have been impacted by, among other things, changes in inflation, movements on individual claims, and changes in the mixture between smaller, more routine claims and larger, more complex claims. We have reviewed the historical variation in loss development patterns for Professional losses. Recorded gross reserves for Professional were$974.3 million as ofDecember 31, 2022 . If the incurred development patterns underlying our net reserves for this line of business change by 20%, a change that we have experienced in the past and that management considers possible, the estimated net reserve could change by$50.0 million , in either direction. Specialty reserves are also affected by loss development pattern assumptions. Historically, assumptions on loss development patterns have been impact by, among other things, movements on individual claims, and economic conditions. We have reviewed the historical variation in loss development patterns for Specialty losses. Recorded gross reserves for Specialty were$118.9 million as ofDecember 31, 2022 . If the incurred development patterns underlying our net reserves for this line of business change by 20%, a change that we have experienced in the past and that management considers possible, the estimated net reserve could change by$5.0 million , in either direction. Our Property reserves are analyzed by the characteristics of the underlying exposures. Property loss reserves are characterized by relatively short periods between occurrence, reporting, determination of coverage and ultimate claims settlement. These property loss reserves tend to be the most predictable. Catastrophic loss reserves tend to exhibit more volatility due to the nature of the underlying loss event which may cause delays and complexity in estimating ultimate loss exposure. 91
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Loss Reserve Estimation Variability
After reviewing the output from various loss reserving methodologies, we select our best estimate of reserves. We believe that the aggregate loss reserves atDecember 31, 2022 were adequate to cover claims for losses that have occurred, including both known claims and claims yet to be reported. As ofDecember 31, 2022 , we recorded gross loss reserves of$5,051.6 million and loss reserves net of reinsurance of$2,213.1 million . Although our financial reports reflect our best estimate of reserves, it is unlikely that the final amount paid will exactly equal our best estimate. In order to provide an indication of the variability in loss reserve estimates, we develop reserve ranges by evaluating the variability implied by the results of the various methods and impact of changing the assumptions and factors used in the loss reserving process. We estimate our range of reserves, net of reinsurance, at approximately$2,055.0 million to$2,471.0 million as ofDecember 31, 2022 . In determining this range, we evaluated the variability of the loss reserves for each of our major operating segments, comprising both ongoing operations and run-off businesses. Our estimated range does not make a specific provision for sources of unknown or unanticipated correlated events such as potential sources of liability not anticipated at the time coverage was afforded, such as asbestos. These events in combination with other events which may not be contemplated by management in developing our range may cause reserves to develop either more or less favorably than indicated by assumptions that we consider reasonable. This means that the range of reserve values does not represent the range of all possible favorable or unfavorable reserve outcomes, and actual ultimate paid losses may fall outside this range. No one risk factor has been isolated for the purpose of performing a sensitivity or variability analysis on that particular risk factor. In establishing our best estimate for reserves, we consider facts currently known and the present judicial and legislative environment among other factors. However, given the expansion of coverage and liability by the courts, legislation in the recent past and possibility of similar interpretations in the future, particularly with regard to asbestos and environmental claims, additional loss reserves may develop in future periods. These potential increases cannot be reasonably estimated at the present time. Any increases could have an adverse impact on future operating results, liquidity, risk-based capital ratios and ratings assigned to our insurance subsidiaries by the nationally recognized insurance rating agencies.
Valuation of Investments
Our investments in fixed maturities and stocks are classified as available-for-sale and reported at fair value under GAAP. Changes in the fair value of fixed maturity investments classified as available-for-sale are not recognized in income during the period, but rather are recognized as a separate component of shareholders' equity until realized. Consistent with ASU 2016-1, all changes in the fair value of equity securities, whether temporary or other-than-temporary, are recognized in net realized investment (losses) gains in the Consolidated Statement of Income. Fair values of these investments are estimated using prices obtained from third-party pricing services, where available. For securities where we are unable to obtain fair values from a pricing service or broker, fair values are estimated using information obtained from investment advisors. Our investments in hedge and private equity funds and other private equity direct investments are accounted for under the equity method of accounting, with changes in the value of investments recognized in net investment income during the period. Management performed several processes to ascertain the reasonableness of investment values included in our consolidated financial statements atDecember 31, 2022 , including (1) obtaining and reviewing internal control reports for our accounting service providers that obtain fair values from third-party pricing services, (2) obtaining and reviewing evaluated pricing methodology documentation from third-party pricing services and (3) comparing the security pricing received from a secondary third-party pricing service versus the prices used in our consolidated financial statements and obtained additional information for variances that exceeded a certain threshold. As ofDecember 31 , 2022,investments classified as available-for-sale for which we did not receive a fair value from a pricing service or broker accounted for less than 1% of our investment portfolio. The actual value at which such securities could be sold or settled with a willing buyer or seller may differ from such estimated fair values depending on a number of factors including, but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market and the availability of a willing buyer or seller. 92
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Where we intend to sell or will be required to sell a fixed maturity investment prior to recovery, a credit loss will be recognized through income as a realized loss. For fixed maturities for which a decline in the fair value between amortized cost is due to credit-related factors, an allowance is established. If a decline in the value of a particular investment is believed to be non-credit-related, the decline is recorded as an unrealized loss, net of tax, in other comprehensive income as a separate component of shareholders' equity. We evaluate our investments for impairment. We regularly monitor the difference between the estimated fair values of our investments and their cost or book values to identify underperforming investments. For fixed maturity securities, the evaluation for a credit loss is generally based on the present value of expected cash flows of the security as compared to the amortized book value. For mortgage-backed securities, loss frequency and severity inputs are used in projecting future cash flows of the securities. Loss frequency is measured as the credit default rate, which includes such factors as loan-to-value ratios and credit scores of borrowers. Loss severity includes such factors as trends in overall housing prices and house prices that are obtained at foreclosure. For the year endedDecember 31, 2022 , we recorded an allowance for credit losses of$2.8 million . In 2021, we recorded an allowance for credit losses of$2.5 million .
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