Argo Group International (ARGO-PA) 10-Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2012

OR

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

For the transition period from             to             

Commission File Number: 1-15259

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

(Exact name of registrant as specified in its charter)

Bermuda	98-0214719
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

110 Pitts Bay Road Pembroke HM08 Bermuda	P.O. Box HM 1282 Hamilton HM FX Bermuda
(Address of principal executive offices)	(Mailing Address)

(441) 296-5858

(Registrant’s telephone number, including area code)

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

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

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

Large Accelerated Filer  þ Accelerated Filer    ¨ Non-accelerated Filer  ¨ Smaller Reporting Company  ¨

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

Indicate the number of shares outstanding (net of treasury shares) of each of the issuer’s classes of common shares as of November 5, 2012.

Title	Outstanding
Common Shares, par value $1.00 per share	25,119,631

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

INDEX

PART I.	FINANCIAL INFORMATION	3
Item 1.	Consolidated Financial Statements (unaudited)
	Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011	3
	Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2012 and 2011	4
	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2012 and 2011	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	54
PART II.	OTHER INFORMATION	54
Item 1.	Legal Proceedings	54
Item 1a.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	56

2

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

CONSOLIDATED BALANCE SHEETS

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

	September 30, 2012			December 31, 2011
	(Unaudited)			(As Adjusted)
Assets
Investments:
Fixed maturities, at fair value:
Available-for-sale (cost: 2012 - $2,985.5; 2011 - $3,095.4)	$	3,157.5		$	3,215.5
Equity securities, at fair value (cost: 2012 - $373.3; 2011 - $291.5)		533.3			403.6
Other investments (cost: 2012 - $282.7; 2011 - $232.3)		283.6			232.0
Short-term investments, at fair value (cost: 2012 - $370.5; 2011 - $296.4)		370.5			296.4
Total investments		4,344.9			4,147.5
Cash		142.7			100.9
Accrued investment income		28.8			32.3
Premiums receivable		402.9			309.0
Reinsurance recoverables		1,016.5			1,144.1
Goodwill		153.8			153.8
Intangible assets, net of accumulated amortization		88.4			93.0
Current income taxes receivable, net		21.3			11.2
Deferred acquisition costs, net		107.7			101.5
Ceded unearned premiums		213.0			179.4
Other assets		129.8			105.6
Total assets	$	6,649.8		$	6,378.3
Liabilities and Shareholders’ Equity
Reserves for losses and loss adjustment expenses	$	3,227.9		$	3,291.1
Unearned premiums		787.0			658.2
Accrued underwriting expenses		96.2			78.5
Ceded reinsurance payable, net		368.0			424.5
Funds held		29.7			35.8
Senior unsecured fixed rate notes		143.8			0.0
Other indebtedness		64.5			65.5
Junior subordinated debentures		311.5			311.5
Deferred tax liabilities, net		49.7			18.5
Other liabilities		29.6			31.7
Total liabilities		5,107.9			4,915.3
Shareholders’ equity:
Common shares - $1.00 par, 500,000,000 shares authorized; 31,358,135 and 31,285,469 shares issued at September 30, 2012 and December 31, 2011, respectively		31.4			31.3
Additional paid-in capital		721.2			716.8
Treasury shares (6,248,209 and 4,971,305 shares at September 30, 2012 and December 31, 2011, respectively)		(198.5	)		(160.9	)
Retained earnings		783.7			736.0
Accumulated other comprehensive gain, net of taxes		204.1			139.8
Total shareholders’ equity		1,541.9			1,463.0
Total liabilities and shareholders’ equity	$	6,649.8		$	6,378.3

See accompanying notes.

3

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

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

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2012			2011			2012			2011
				(As Adjusted)						(As Adjusted)
Premiums and other revenue:
Earned premiums	$	304.3		$	270.9		$	871.8		$	804.0
Net investment income		28.9			30.0			90.3			96.3
Fee income, net		3.0			1.4			4.8			1.8
Net realized investment gains		8.3			3.9			18.7			37.7
Total revenue		344.5			306.2			985.6			939.8
Expenses:
Losses and loss adjustment expenses		186.3			199.6			527.9			664.4
Other reinsurance-related expenses		7.0			2.7			20.8			3.1
Underwriting, acquisition and insurance expenses		118.0			104.2			346.3			314.7
Interest expense		5.8			5.6			17.0			16.5
Foreign currency exchange loss (gain)		9.7			(1.9	)		2.8			11.1
Total expenses		326.8			310.2			914.8			1,009.8
Income (loss) before income taxes		17.7			(4.0	)		70.8			(70.0	)
Provision for income taxes		4.3			6.8			13.8			13.3
Net income (loss)	$	13.4		$	(10.8	)	$	57.0		$	(83.3	)
Net income (loss) per common share:
Basic	$	0.53		$	(0.39	)	$	2.22		$	(3.04	)
Diluted	$	0.52		$	(0.39	)	$	2.18		$	(3.04	)
Dividend declared per common share:	$	0.12		$	0.12		$	0.36		$	0.36
Weighted average common shares:
Basic		25,227,194			27,237,788			25,694,761			27,374,953
Diluted		25,756,883			27,237,788			26,101,734			27,374,953
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2012			2011			2012			2011
Realized investment gains before other-than-temporary impairment losses	$	9.4		$	5.1		$	20.7		$	38.9
Other-than-temporary impairment losses recognized in earnings
Other-than-temporary impairment losses on fixed maturities		(1.1	)		(0.1	)		(1.4	)		(0.1	)
Other-than-temporary impairment losses on equity securities		0.0			(1.1	)		(0.6	)		(1.1	)
Non-credit portion of losses recognized in other comprehensive income (loss)		0.0			0.0			0.0			0.0
Impairment losses recognized in earnings		(1.1	)		(1.2	)		(2.0	)		(1.2	)
Net realized investment gains	$	8.3		$	3.9		$	18.7		$	37.7

See accompanying notes.

4

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2012			2011			2012			2011
				(As Adjusted)						(As Adjusted)
Net income (loss)	$	13.4		$	(10.8	)	$	57.0		$	(83.3	)
Other comprehensive income (loss):
Foreign currency translation adjustments		0.9			(5.0	)		(2.4	)		(4.9	)
Defined benefit pension plan:
Net loss arising during the period		0.0			(1.5	)		(0.9	)		(0.9	)
Unrealized gains (losses) on securities:
Gains (losses) arising during the period		64.6			(50.0	)		106.9			(2.7	)
Reclassification adjustment for gains included in net income (loss)		(1.7	)		(6.2	)		(11.1	)		(32.7	)
Other comprehensive income (loss) before tax		63.8			(62.7	)		92.5			(41.2	)
Income tax provision (benefit) related to other comprehensive income (loss):
Defined benefit pension plan:
Net loss arising during the period		0.0			(0.5	)		(0.3	)		(0.3	)
Unrealized gains (losses) on securities:
Gains (losses) arising during the period		17.6			(9.2	)		31.7			3.1
Reclassification adjustment for gains included in net income (loss)		(0.4	)		(1.9	)		(3.2	)		(10.5	)
Income tax provision (benefit) related to other comprehensive income (loss)		17.2			(11.6	)		28.2			(7.7	)
Other comprehensive income (loss), net of tax		46.6			(51.1	)		64.3			(33.5	)
Comprehensive income (loss)	$	60.0		$	(61.9	)	$	121.3		$	(116.8	)

See accompanying notes.

5

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

	For the Nine Months Ended September 30,
	2012			2011
				(As Adjusted)
Cash flows from operating activities:
Net income (loss)	$	57.0		$	(83.3	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization and depreciation		27.9			21.8
Share-based payments expense		7.9			2.5
Excess tax expense from share-based payment arrangements		0.0			0.1
Deferred income tax provision, net		2.6			10.3
Net realized investment gains		(18.6	)		(37.7	)
Loss on disposals of fixed assets, net		0.3			0.2
Change in:
Accrued investment income		3.5			2.0
Receivables		34.6			54.6
Deferred acquisition costs		(6.2	)		2.3
Ceded unearned premiums		(33.9	)		(63.7	)
Reserves for losses and loss adjustment expenses		(74.6	)		197.4
Unearned premiums		129.4			69.3
Ceded reinsurance payable and funds held		(63.4	)		(93.8	)
Income taxes		(10.1	)		(10.4	)
Accrued underwriting expenses		13.2			3.9
Other, net		(6.1	)		(19.3	)
Cash provided by operating activities		63.5			56.2
Cash flows from investing activities:
Sales of fixed maturity investments		886.9			1,021.0
Maturities and mandatory calls of fixed maturity investments		364.9			296.7
Sales of equity securities		9.1			29.8
Sales of other investments		2.5			2.4
Purchases of fixed maturity investments		(1,147.3	)		(1,199.1	)
Purchases of equity securities		(91.4	)		(75.5	)
Purchases of other investments		(12.7	)		(51.9	)
Change in foreign regulatory deposits		(20.2	)		(13.2	)
Change in short-term investments		(78.8	)		21.0
Settlements of foreign currency exchange forward contracts		(0.6	)		9.0
Purchases of fixed assets, net		(26.9	)		(10.8	)
Acquisition of subsidiaries		(1.4	)		(0.5	)
Other, net		2.7			1.2
Cash (used) provided by investing activities		(113.2	)		30.1
Cash flows from financing activities:
Proceeds from issuance of senior unsecured fixed rate notes, net		139.2			0.0
Activity under stock incentive plans		0.7			0.9
Repurchase of Company’s common shares		(38.6	)		(35.9	)
Excess tax expense from share-based payment arrangements		0.0			(0.1	)
Payment of cash dividend to common shareholders		(9.3	)		(10.0	)
Cash provided (used) by financing activities		92.0			(45.1	)
Effect of exchange rate changes on cash		(0.5	)		(4.9	)
Change in cash		41.8			36.3
Cash, beginning of period		100.9			83.5
Cash, end of period	$	142.7		$	119.8

See accompanying notes.

6

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying consolidated financial statements of Argo Group International Holdings, Ltd. (“Argo Group,” “we” or the “Company”) and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. The preparation of interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The major estimates reflected in our consolidated financial statements include, but are not limited to, the reserves for losses and loss adjustment expenses, reinsurance recoverables, including the reinsurance recoverables allowance for doubtful accounts, estimates of written and earned premiums, reinsurance premium receivable, the fair value of investments, the valuation of goodwill and intangibles and our deferred tax asset valuation allowance. Actual results could differ from those estimates. Certain financial information that normally is included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission on February 29, 2012.

The interim financial information as of, and for the three and nine months ended, September 30, 2012 and 2011 is unaudited. However, in the opinion of management, the interim information includes all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results presented for the interim periods. The operating results for the interim periods are not necessarily indicative of the results to be expected for the full year. All significant intercompany amounts have been eliminated in consolidation. Certain amounts applicable to prior periods have been reclassified to conform to the presentation followed as of September 30, 2012.

Adoption of New Accounting Standard Update for Deferred Acquisition Costs

In October 2010, the Financial Accounting Standards Board (“FASB”) issued an accounting update that amends the guidance in the FASB Accounting Standards Codification Topic 944, entitled “Financial Services – Insurance.” The amendments in the update modify the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. On January 1, 2012, we retrospectively adopted this authoritative guidance, resulting in the consolidated financial statements being retrospectively adjusted for all periods presented in accordance with this amended guidance.

The effect of the retrospective adoption on individual financial statement line items in our Consolidated Balance Sheet was as follows:

	December 31, 2011
(in millions)	As Previously Reported		As Adjusted		Effect of Change
Reinsurance recoverables	$	1,143.5	$	1,144.1	$	0.6
Deferred acquisition costs, net		125.7		101.5		(24.2	)
Deferred tax liabilities, net		26.1		18.5		(7.6	)
Retained earnings		752.0		736.0		(16.0	)

7

The effect of the retrospective adoption on individual financial statement line items in our Consolidated Statements of Loss for the three and nine months ended September 30, 2011 was as follows:

	Three months ended September 30, 2011									Nine months ended September 30, 2011
(in millions, except per share data)	As Previously Reported			As Adjusted			Effect of Change			As Previously Reported			As Adjusted			Effect of Change
Underwriting, acquisition and insurance expenses	$	106.3		$	104.2		$	(2.1	)	$	315.9		$	314.7		$	(1.2	)
Loss before income taxes		(6.1	)		(4.0	)		2.1			(71.2	)		(70.0	)		1.2
Provision for income taxes		6.0			6.8			0.8			12.6			13.3			0.7
Net loss		(12.1	)		(10.8	)		1.3			(83.8	)		(83.3	)		0.5
Net loss per common share:
Basic	$	(0.44	)	$	(0.39	)	$	0.05		$	(3.06	)	$	(3.04	)	$	0.02
Diluted		(0.44	)		(0.39	)		0.05			(3.06	)		(3.04	)		0.02

There were no changes to net cash flows from operating, investing or financing activities in our Consolidated Statement of Cash Flow for the comparative period presented as a result of the adoption of this authoritative guidance. In this Form 10-Q, interim financial information for the three and nine months ended September 30, 2011 and balances at December 31, 2011 have been adjusted in accordance with the adoption of this authoritative guidance.

2. Recently Issued Accounting Standards

In May 2011, the FASB issued amendments to “Fair Value Measurement” (Topic 820). The amendments were to achieve common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. There are changes to how premiums and discounts (including blockage factors) are applied. There are clarifications made to principal market determination. The amendments also clarify that the highest and best use and valuation premise concepts are not applicable to financial instruments. There are amendments that indicate how a company should determine the fair value of its own equity instruments and the fair value of liabilities. New disclosures, with a particular focus on Level 3 measurement, are required. All transfers between Level 1 and Level 2 will now be required to be disclosed. Information about when the current use of a non-financial asset measured at fair value differs from its highest and best use is to be disclosed. The amendments in this update are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. The adoption of this amendment did not have a material impact on our financial results and disclosures.

In September 2011, the FASB issued an accounting update to simplify how entities test goodwill for impairment. The update permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, “Intangibles–Goodwill and Other.” The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Previous guidance required an entity to test goodwill for impairment on at least an annual basis by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any. Under the update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period had not yet been issued or, for nonpublic entities, had not yet been made available for issuance. The adoption of this update did not have an impact on our financial results and disclosures.

8

In December 2011, the FASB issued an accounting update deferring the requirement that companies present reclassification adjustments for each component of Accumulated Other Comprehensive Income in both net income and Other Comprehensive Income on the face of the financial statements. Companies are still required to present amounts reclassified out of Accumulated Other Comprehensive Income on the face of the financial statements or disclose those amounts in the notes to the financial statements. During the deferral period, there is no requirement to separately present or disclose the reclassification adjustments into net income. The FASB expects to complete a project to reconsider the presentation requirements for reclassification adjustments in 2012. This deferral will have no impact on our Consolidated Statements of Comprehensive Income (Loss), but may impact the presentation of our Consolidated Statements of Income (Loss).

In December 2011, the FASB issued an accounting update requiring disclosures about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This update is applicable to derivatives, sale and repurchase agreements and reverse sale and repurchase agreements and securities borrowing and securities lending arrangements. The update is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The disclosures required by this update should be provided retrospectively for all comparative periods presented. We do not anticipate that this update will have an impact on our financial results and disclosures.

In July 2012, the FASB issued an accounting update that allows an entity the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If the more-likely-than-not threshold is met, an entity is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with accounting guidance. This update will reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets and will improve consistency in impairment testing guidance among long-lived asset categories. The update is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. We do not anticipate that this update will have an impact on our financial results and disclosures.

9

3. Investments

Composition of Invested Assets

The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investments as of September 30, 2012 and December 31, 2011 were as follows:

September 30, 2012 (in millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Fixed maturities
USD denominated:
U.S. Governments(1)	$	406.0	$	10.9	$	0.0	$	416.9
Non-U.S. Governments		56.6		3.5		0.1		60.0
Obligations of states and political subdivisions		560.7		49.4		0.3		609.8
Credit-Financial		366.4		24.6		0.7		390.3
Credit-Industrial		411.2		32.1		1.0		442.3
Credit-Utility		183.0		12.3		0.6		194.7
Structured securities:
CMO/MBS-agency(2)		418.7		25.9		0.1		444.5
CMO/MBS-non agency		13.6		0.8		0.2		14.2
CMBS(3)		104.9		6.3		0.2		111.0
ABS-residential(4)		11.1		0.3		1.0		10.4
ABS-non residential		77.1		1.2		0.0		78.3
Foreign denominated:
Governments		250.3		10.5		5.3		255.5
Credit		125.9		6.4		2.7		129.6
Total fixed maturities		2,985.5		184.2		12.2		3,157.5
Equity securities		373.3		165.9		5.9		533.3
Other investments		282.7		3.1		2.2		283.6
Short-term investments		370.5		0.0		0.0		370.5
Total investments	$	4,012.0	$	353.2	$	20.3	$	4,344.9

⁽¹⁾  Includes corporate bonds backed by the Federal Deposit Insurance Corporation of $4.3 million amortized cost, $4.3 million fair value.

⁽²⁾ Collateralized mortgage obligations/mortgage-backed securities (“CMO/MBS”).

⁽³⁾ Commercial mortgage-backed securities (“CMBS”).

⁽⁴⁾ Asset-backed securities (“ABS”).

10

December 31, 2011			Gross		Gross
(in millions)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Fixed maturities
USD denominated:
U.S. Governments(1)	$	482.8	$	12.5	$	0.0	$	495.3
Non-U.S. Governments		56.2		1.0		1.6		55.6
Obligations of states and politicalsubdivisions		589.3		47.4		0.3		636.4
Credit-Financial		378.3		10.4		5.2		383.5
Credit-Industrial		411.6		20.8		3.4		429.0
Credit-Utility		163.9		7.5		1.2		170.2
Structured securities:
CMO/MBS-agency(2)		516.0		30.7		0.2		546.5
CMO/MBS-non agency		18.5		0.7		0.8		18.4
CMBS(3)		100.7		5.2		0.3		105.6
ABS-residential(4)		15.3		0.1		2.0		13.4
ABS-non residential		47.0		1.0		0.0		48.0
Foreign denominated:
Governments		224.7		9.1		8.8		225.0
Credit		91.1		2.2		4.7		88.6
Total fixed maturities		3,095.4		148.6		28.5		3,215.5
Equity securities		291.5		120.7		8.6		403.6
Other investments		232.3		0.7		1.0		232.0
Short-term investments		296.4		0.0		0.0		296.4
Total investments	$	3,915.6	$	270.0	$	38.1	$	4,147.5

⁽¹⁾ Includes corporate bonds backed by the Federal Deposit Insurance Corporation of $48.7 million amortized cost, $49.1 million fair value.

⁽²⁾ Collateralized mortgage obligations/mortgage-backed securities (“CMO/MBS”).

⁽³⁾ Commercial mortgage-backed securities (“CMBS”).

⁽⁴⁾ Asset-backed securities (“ABS”).

Included in total investments at September 30, 2012 and December 31, 2011 was $150.1 million and $162.6 million, respectively, of assets managed on behalf of the trade capital providers, who are third party capital participants that provide underwriting capital to our Syndicate 1200 segment.

Contractual Maturity

The amortized cost and fair values of fixed maturity investments as of September 30, 2012, by contractual maturity, were as follows:

(in millions)	Amortized Cost		Fair Value
Due in one year or less	$	240.1	$	242.7
Due after one year through five years		1,164.7		1,209.8
Due after five years through ten years		763.6		837.1
Thereafter		191.7		209.5
Structured securities		625.4		658.4
Total	$	2,985.5	$	3,157.5

The expected maturities may differ from the contractual maturities because debtors may have the right to call or prepay obligations.

11

Unrealized Losses and Other-Than-Temporary Impairments

An aging of unrealized losses on our investments at September 30, 2012 and December 31, 2011 is presented below:

September 30, 2012	Less Than One Year				One Year or Greater				Total
(in millions)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturities
USD denominated:
U.S. Governments (1)	$	2.2	$	0.0	$	0.0	$	0.0	$	2.2	$	0.0
Non-U.S. Governments(2)		5.4		0.1		0.6		0.0		6.0		0.1
Obligations of states and political subdivisions		5.1		0.1		0.7		0.2		5.8		0.3
Credit-Financial		10.2		0.1		9.9		0.6		20.1		0.7
Credit-Industrial		21.6		0.4		6.2		0.6		27.8		1.0
Credit-Utility		4.4		0.2		1.3		0.4		5.7		0.6
Structured securities:
CMO/MBS-agency (2)		8.4		0.1		0.3		0.0		8.7		0.1
CMO/MBS-non agency		2.0		0.1		2.5		0.1		4.5		0.2
CMBS (1)		0.4		0.0		3.8		0.2		4.2		0.2
ABS-residential (1)		0.3		0.0		5.4		1.0		5.7		1.0
ABS-non residential(1) (2)		3.9		0.0		0.2		0.0		4.1		0.0
Foreign denominated:
Governments(2)		118.9		5.3		0.3		0.0		119.2		5.3
Credit		49.3		2.7		0.0		0.0		49.3		2.7
Total fixed maturities		232.1		9.1		31.2		3.1		263.3		12.2
Equity securities		40.8		2.7		14.0		3.2		54.8		5.9
Other investments		14.3		2.2		0.0		0.0		14.3		2.2
Short-term investments(1)		1.1		0.0		0.0		0.0		1.1		0.0
Total	$	288.3	$	14.0	$	45.2	$	6.3	$	333.5	$	20.3

⁽¹⁾  Unrealized losses less than one year are less than $0.1 million.

⁽²⁾  Unrealized losses one year or greater are less than $0.1 million.

12

December 31, 2011	Less Than One Year					One Year or Greater				Total
(in millions)	Fair Value			Unrealized Losses		Fair Value		Unrealized Losses		Fair Value			Unrealized Losses
Fixed maturities
USD denominated:
U.S. Governments(1)	$	41.0		$	0.0	$	0.0	$	0.0	$	41.0		$	0.0
Non-U.S. Governments		22.4			1.6		0.0		0.0		22.4			1.6
Obligations of states and political subdivisions(1)		1.4			0.0		0.7		0.3		2.1			0.3
Credit-Financial		81.8			3.8		9.4		1.4		91.2			5.2
Credit-Industrial		67.4			3.4		0.0		0.0		67.4			3.4
Credit-Utility		21.7			1.2		0.0		0.0		21.7			1.2
Structured securities:
CMO/MBS-agency		28.9			0.1		3.2		0.1		32.1			0.2
CMO/MBS-non agency		6.7			0.2		4.2		0.6		10.9			0.8
CMBS (1)		0.7			0.0		4.2		0.3		4.9			0.3
ABS-residential		1.2			0.1		9.6		1.9		10.8			2.0
ABS-non residential(1) (2)		4.0			0.0		0.3		0.0		4.3			0.0
Foreign denominated:
Governments		166.3			8.8		0.0		0.0		166.3			8.8
Credit		65.9			4.1		5.3		0.6		71.2			4.7
Total fixed maturities		509.4			23.3		36.9		5.2		546.3			28.5
Equity securities		84.3			8.5		0.2		0.1		84.5			8.6
Other investments(3)		(1.0	)		1.0		0.0		0.0		(1.0	)		1.0
Short-term investments(1)		21.2			0.0		0.0		0.0		21.2			0.0
Total	$	613.9		$	32.8	$	37.1	$	5.3	$	651.0		$	38.1

⁽¹⁾  Unrealized losses less than one year are less than $0.1 million.

⁽²⁾  Unrealized losses one year or greater are less than $0.1 million.

⁽³⁾  Unrealized foreign currency exchange position at December 31, 2011.

We hold a total of 6,143 securities, of which 677 were in an unrealized loss position for less than one year and 151 were in an unrealized loss position for a period one year or greater as of September 30, 2012. Unrealized losses greater than twelve months on fixed maturities were the result of a number of factors, including increased credit spreads, foreign currency fluctuations, and higher market yields relative to the date the securities were purchased, and for structured securities, by the performance of the underlying collateral as well. Unrealized losses greater than twelve months on equity securities were principally the result of current market conditions. We currently do not intend to sell these securities and will likely not be required to sell these securities. We do not consider these investments to be other-than-temporarily impaired at September 30, 2012.

We regularly evaluate our investments for impairment. 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 MBS and residential ABS securities, frequency and severity of loss inputs are used in projecting future cash flows of the securities. Frequency of loss is measured as the credit default rate, which includes such factors as loan-to-value ratios and credit scores of borrowers. Severity of loss includes such factors as trends in overall housing prices and house prices that are obtained at foreclosure. We recognized other-than-temporary losses on our fixed maturities portfolio of $1.1 million and $1.4 million for the three months and nine months ended September 30, 2012, respectively. We recognized other-than-temporary losses on our fixed maturities portfolio of $0.1 million and $0.1 million for the three and nine months ended September 30, 2011, respectively. For equity securities, the length of time and the amount of decline in fair value are the principal factors in determining other-than-temporary impairment. We recognized other-than-temporary losses on our equity portfolio of $0.0 million and $0.6 million for the three and nine months ended September 30, 2012, respectively. We recognized other-than-temporary losses on our equity portfolio of $1.1 million and $1.1 million for the three and nine months ended September 30, 2011, respectively.

13

Realized Gains and Losses

The following table presents the Company’s gross realized investment gains (losses) for the three and nine months ended September 30:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in millions)	2012			2011			2012			2011
Realized gains
Fixed maturities	$	5.5		$	8.4		$	21.0		$	25.5
Equity securities		0.2			0.9			0.4			15.7
Other investments		7.7			3.2			20.8			11.6
Short-term investments		0.2			0.7			0.5			1.0
Gross realized gains		13.6			13.2			42.7			53.8
Realized losses
Fixed maturities		(3.0	)		(2.5	)		(8.1	)		(6.8	)
Equity securities		(0.1	)		0.0			(0.4	)		(0.7	)
Other investments		(1.1	)		(5.6	)		(13.2	)		(6.9	)
Short-term investments		0.0			0.0			(0.3	)		(0.5	)
Other-than-temporary impairment losses on fixed maturities		(1.1	)		(0.1	)		(1.4	)		(0.1	)
Other-than-temporary impairment losses on equity securities		0.0			(1.1	)		(0.6	)		(1.1	)
Gross realized losses		(5.3	)		(9.3	)		(24.0	)		(16.1	)
Net realized investment gains	$	8.3		$	3.9		$	18.7		$	37.7

We enter into short-term, currency spot and forward contracts to mitigate foreign exchange rate exposure for certain non-U.S. Dollar denominated fixed maturity investments. The forward contracts used are typically less than sixty days and are renewed, as long as the non-U.S. Dollar denominated fixed maturity investments are held in our portfolio. These forward contracts are designated as fair value hedges for accounting purposes.

As of September 30, 2012 and 2011, we hedged $2.4 million and $4.3 million, respectively, of certain holdings in non-U.S. Dollar denominated fixed maturity investments with $2.3 million and $4.3 million, respectively, of foreign exchange forward contracts. The net realized effect on income was not significant.

We also enter into foreign currency exchange forward contracts to manage currency exposure on losses related to global catastrophe events. These currency forward contracts are carried at fair value in the Consolidated Balance Sheets in Other investments. The realized and unrealized gains and losses are included in realized gains or losses in the Consolidated Statements of Income (Loss). The notional amount of the currency forward contracts was $104.9 million and $133.4 million as of September 30, 2012 and 2011, respectively. The fair value of the currency forward contracts was a gain of $2.5 million and a loss of $4.3 million as of September 30, 2012 and 2011, respectively. We recognized net realized gains from the currency forward contacts of $2.5 million and $2.8 million and net realized losses of $1.1 million and net realized gains of $2.8 million for the three and nine months ended September 30, 2012 and 2011, respectively.

During the second quarter of 2012, we entered into a put option contract to hedge the foreign currency exposure on a portion of our Euro-denominated investment portfolio. This put option expires prior to the end of the year and has a fair value of $0.3 million at September 30, 2012. We recognized realized losses from the put option contract of $0.4 million and $0.5 million for the three and nine months ended September 30, 2012, respectively.

14

Regulatory Deposits, Pledged Securities and Letters of Credit

At September 30, 2012, the amortized cost and fair value of investments on deposit for regulatory purposes and reinsurance were $210.7 million and $229.3 million, respectively.

Investments with an amortized cost of $201.2 million and fair value of $204.5 million were pledged as collateral in support of irrevocable letters of credit at September 30, 2012. These assets support irrevocable letters of credit issued under the terms of certain reinsurance agreements in respect of reported loss and loss expense reserves in the amount of $45.5 million, and $124.9 million for our Corporate member’s capital as security to support the underwriting business at Lloyd’s of London (“Lloyd’s”).

At September 30, 2012, our Corporate member’s capital supporting our Lloyd’s business consisted of:

(in millions)
Letters of credit	$	124.9
Fixed maturities, at fair value		174.2
Short-term investments, at fair value		9.0
Total securities and letters of credit pledged to Lloyd’s	$	308.1

Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability, or in the absence of a principal market, the most advantageous market. Market participants are buyers and sellers in the principal (or most advantageous) market that are independent, knowledgeable, able to transact for the asset or liability and willing to transact for the asset or liability.

Valuation techniques consistent with the market approach, income approach and/or cost approach are used to measure fair value. The inputs of these valuation techniques are categorized into three levels.

• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the reporting date. We define actively traded as a security that has traded in the past seven days. We receive one quote per instrument for Level 1 inputs.

• Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. We receive one quote per instrument for Level 2 inputs.

• Level 3 inputs are unobservable inputs. Unobservable inputs reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.

We receive fair value prices from third-party pricing services and our outside investment managers. These prices are determined using observable market information such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. We have reviewed the processes used by the third-party providers for pricing the securities, and have determined that these processes result in fair values consistent with GAAP requirements. In addition, we reviewed these prices for reasonableness, and have not adjusted any prices received from the third-party providers as of September 30, 2012. A description of the valuation techniques we use to measure assets at fair value is as follows:

15

Fixed Maturities (Available-for-Sale) Levels 1 and 2:

• United States Treasury securities are typically valued using Level 1 inputs. For these securities, we obtain fair value measurements from third-party pricing services using quoted prices (unadjusted) in active markets at the reporting date.

• United States Government agencies, non-U.S. Government securities, obligations of states and political subdivisions, credit securities and foreign denominated securities are reported at fair value utilizing Level 2 inputs. For these securities, we obtain fair value measurements from third-party pricing services.

• CMO/MBS agency securities are reported at fair value utilizing Level 2 inputs. For these securities, we obtain fair value measurements from third-party pricing services. Observable data may include dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. All of these securities are backed by United States agencies and are of the highest investment grade.

• CMO/MBS non-agency, CMBS, ABS residential, and ABS non-residential securities are reported at fair value utilizing Level 2 inputs. For these securities, we obtain fair value measurements from third-party pricing services. Observable data may include dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.

Fixed Maturities (Available-for-Sale) Level 3:

• Corporate securities reported at fair value utilizing Level 3 inputs are infrequently traded securities valued by an investment manager utilizing unobservable inputs.

Transfers Between Level 1 and Level 2 Securities: There were no transfers between Level 1 and Level 2 securities during the three or nine months ended September 30, 2012.

Equity Securities Level 1:Equity securities are principally reported at fair value utilizing Level 1 inputs. For these securities, we obtain fair value measurements from a third-party pricing service using quoted prices (unadjusted) in active markets at the reporting date.

Equity Securities Level 2:We own an interest in a mutual fund that is reported at fair value utilizing Level 2 inputs. The valuation is based on the fund’s net asset value per share, determined weekly and at the end of each month. The underlying assets in the fund are valued primarily on the basis of closing market quotations or official closing prices on each valuation day.

Equity Securities Level 3: We own certain equity securities that are reported at fair value utilizing Level 3 inputs. The valuation techniques for these securities include the following:

• Fair value measurements are obtained from the National Association of Insurance Commissioners’ Security Valuation Office at the reporting date.

• Fair value measurements for an investment in an equity fund are obtained by applying final prices provided by the administrator of the fund, which is based upon certain estimates and assumptions.

16

Other Investments Level 2: Foreign regulatory deposits are assets held in trust in jurisdictions where there is a legal and regulatory requirement to maintain funds locally in order to protect policyholders. Lloyd’s is the appointed investment manager for the funds. These assets are invested in short term government securities, agency securities and corporate bonds and are valued utilizing Level 2 inputs based upon values obtained from Lloyd’s. Foreign currency future contracts are valued by our counterparty utilizing market driven foreign currency exchange rates and are considered Level 2 investments. There were no transfers of other investments between Level 1 and Level 2 for the three or nine months ended September 30, 2012.

Short-term Investments: Short-term investments are principally reported at fair value utilizing Level 1 inputs, with the exception of short-term corporate bonds reported at fair value utilizing Level 2 inputs as described in the fixed maturities section above. Values for the investments categorized as Level 1 are obtained from various financial institutions as of the reporting date. Included in short-term investments are Funds at Lloyd’s, which represent a portion of our Corporate member’s capital as security to support the underwriting business at Lloyd’s and include principally short-term money market accounts. There were no transfers of short-term investments between Level 1 and Level 2 for the three months or nine months ended September 30, 2012.

Other Assets Level 3: We entered into two reinsurance contracts that are deemed derivatives. The fair value was estimated by management taking into account changes in the market for catastrophic bond reinsurance contracts with similar economic characteristics and potential recoveries from events preceding the valuation date. See Note 10 “Derivative Instruments” for related disclosures.

Based on an analysis of the inputs, our financial assets measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011 have been categorized as follows:

			Fair Value Measurements at Reporting Date Using
(in millions)	September 30, 2012		Level 1(a)		Level 2(b)		Level 3 (c)
Fixed maturities
USD denominated:
U.S. Governments	$	416.9	$	219.2	$	197.7	$	0.0
Non-U.S. Governments		60.0		0.0		60.0		0.0
Obligations of states and political subdivisions		609.8		0.0		609.8		0.0
Credit-Financial		390.3		0.0		390.3		0.0
Credit-Industrial		442.3		0.0		442.3		0.0
Credit-Utility		194.7		0.0		194.7		0.0
Structured securities:
CMO/MBS-agency		444.5		0.0		444.5		0.0
CMO/MBS-non agency		14.2		0.0		14.2		0.0
CMBS		111.0		0.0		111.0		0.0
ABS-residential		10.4		0.0		10.4		0.0
ABS-non residential		78.3		0.0		78.3		0.0
Foreign denominated:
Governments		255.5		0.0		255.5		0.0
Credit		129.6		0.0		129.6		0.0
Total fixed maturities		3,157.5		219.2		2,938.3		0.0
Equity securities		533.3		480.7		50.8		1.8
Other investments		139.0		0.0		139.0		0.0
Short-term investments		370.5		321.5		49.0		0.0
Other assets		6.4		0.0		0.0		6.4
	$	4,206.7	$	1,021.4	$	3,177.1	$	8.2

^(a) Quoted prices in active markets for identical assets

^(b)  Significant other observable inputs

^(c)  Significant unobservable inputs

17

			Fair Value Measurements at Reporting Date Using
(in millions)	December 31, 2011		Level 1(a)		Level 2(b)		Level 3(c)
Fixed maturities
USD denominated:
U.S. Governments	$	495.3	$	214.9	$	280.4	$	0.0
Non-U.S. Governments		55.6		0.0		55.6		0.0
Obligations of states and political subdivisions		636.4		0.0		636.4		0.0
Credit-Financial		383.5		0.0		382.8		0.7
Credit-Industrial		429.0		0.0		429.0		0.0
Credit-Utility		170.2		0.0		170.2		0.0
Structured securities:
CMO/MBS-agency		546.5		0.0		546.5		0.0
CMO/MBS-non agency		18.4		0.0		18.4		0.0
CMBS		105.6		0.0		105.6		0.0
ABS-residential		13.4		0.0		13.4		0.0
ABS-non residential		48.0		0.0		48.0		0.0
Foreign denominated:
Governments		225.0		0.0		225.0		0.0
Credit		88.6		0.0		88.6		0.0
Total fixed maturities		3,215.5		214.9		2,999.9		0.7
Equity securities		403.6		352.2		49.0		2.4
Other investments		99.9		0.0		99.9		0.0
Short-term investments		296.4		260.7		35.7		0.0
Other assets		9.0		0.0		0.0		9.0
	$	4,024.4	$	827.8	$	3,184.5	$	12.1

^(a)  Quoted prices in active markets for identical assets

^(b)  Significant other observable inputs

^(c)  Significant unobservable inputs

The fair value measurements in the tables above do not agree to “Total investments” on the Consolidated Balance Sheets as they exclude certain other investments that are accounted for under the equity-method of accounting and include reinsurance contracts that are classified as Other assets.

A reconciliation of the beginning and ending balances for the investments categorized as Level 3 at September 30, 2012 and December 31, 2011 are as follows:

Fair Value Measurements Using Unobservable Inputs (Level 3)

(in millions)	Credit Financial			Equity Securities			Other Assets			Total
Beginning balance, January 1, 2012	$	0.7		$	2.4		$	9.0		$	12.1
Transfers into Level 3		0.0			0.0			0.0			0.0
Transfers out of Level 3		0.0			0.0			0.0			0.0
Total gains or losses (realized/unrealized):
Included in net income		0.1			0.0			0.0			0.1
Included in other comprehensive income		0.0			0.0			0.0			0.0
Purchases, issuances, sales, and settlements
Purchases		0.0			0.0			0.0			0.0
Issuances		0.0			0.0			0.0			0.0
Sales		(0.8	)		(0.6	)		(2.6	)		(4.0	)
Settlements		0.0			0.0			0.0			0.0
Ending balance, September 30, 2012	$	(0.0	)	$	1.8		$	6.4		$	8.2
Amount of total gains or losses for the period included in net income attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2012	$	0.0		$	0.0		$	0.0		$	0.0

18

Fair Value Measurements Using Unobservable Inputs (Level 3)

(in millions)	Credit Financial		Equity Securities			Other Assets		Total
Beginning balance, January 1, 2011	$	0.7	$	21.0		$	0.0	$	21.7
Transfers into Level 3		0.0		0.0			0.0		0.0
Transfers out of Level 3		0.0		0.0			0.0		0.0
Total gains or losses (realized/unrealized):
Included in net loss		0.0		20.5			0.0		20.5
Included in other comprehensive income		0.0		(15.5	)		0.0		(15.5	)
Purchases, issuances, sales, and settlements
Purchases		0.0		0.0			9.0		9.0
Issuances		0.0		0.0			0.0		0.0
Sales		0.0		(23.6	)		0.0		(23.6	)
Settlements		0.0		0.0			0.0		0.0
Ending balance, December 31, 2011	$	0.7	$	2.4		$	9.0	$	12.1
Amount of total gains or losses for the period included in net loss attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2011	$	0.0	$	0.0		$	0.0	$	0.0

The equity securities activity during 2011 was primarily related to the sale of one security.

At September 30, 2012, we did not have any financial assets or financial liabilities measured at fair value on a nonrecurring basis.

4. Shareholders’ Equity

On August 7, 2012 and August 5, 2011, our Board of Directors declared a quarterly cash dividend in the amount of $0.12 on each share of common stock outstanding. On September 18, 2012 and September 15, 2011, we paid $3.0 million and $3.3 million, respectively, to our shareholders of record on September 4, 2012 and September 1, 2011, respectively. For the nine months ended September 30, 2012 and 2011, we have paid cash dividends totaling $9.3 million and $9.9 million to our shareholders.

On February 18, 2011, our Board of Directors authorized the repurchase of up to $150.0 million of our common shares (“2011 Repurchase Authorization”). The 2011 Repurchase Authorization supersedes the November 13, 2007 repurchase authorization, which also had authorized the repurchase of up to $150.0 million of our common shares. From inception of the repurchase authorizations through September 30, 2012, we have repurchased 6,248,209 shares of our common stock at an average price of $31.76 for a total cost of $198.5 million. These shares are being held as treasury shares in accordance with the provisions of the Bermuda Companies Act 1981. As of September 30, 2012, availability under the 2011 Repurchase Authorization for future repurchases of our common shares was $78.0 million.

A summary of activity from January 1, 2012 through September 30, 2012 follows.

For the three and nine months ended September 30, 2012, we repurchased 120,400 and 291,567 common shares on the open market for $3.7 million and $8.6 million, respectively.

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In 2012, we repurchased shares under Securities Exchange Act of 1934 Rule 10b5-1 trading plans as follows:

Date Trading Plan Initiated	2012 Purchase Period	Number of Shares Repurchased		Average Price of Shares Repurchased		Total Cost (in millions)		Repurchase Authorization Year
12/14/2011	01/01/12-02/16/12 (1)		184,311	$	29.13	$	5.4		2011
03/14/2012	03/16/12-05/10/12		468,944	$	29.32	$	13.8		2011
06/14/2012	06/18/12-08/09/12(2)		332,082	$	29.63	$	9.8		2011

⁽¹⁾  The above table only reflects the 2012 activity under this Rule 10b5-1 trading plan. In 2011, 73,018 shares were repurchased under this Rule 10b5-1 trading plan for a total cost of $2.1 million. Total shares repurchased in 2011 and 2012 under this Rule 10b5-1 trading plan are 257,329 shares at an average price of $29.06 for a total cost of $7.5 million.

⁽²⁾  During the three months ended September 30, 2012, 215,582 shares were repurchased at an average price of $30.28 for a total cost of $6.5 million.

5.    Net Income (Loss) Per Common Share

The following table presents the calculation of net income (loss) per common share on a basic and diluted basis for the three and nine months ended September 30, 2012 and 2011:

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
(in millions, except number of shares and per share amounts)	2012		2011			2012		2011
Net income (loss)	$	13.4	$	(10.8	)	$	57.0	$	(83.3	)
Weighted average common shares outstanding - basic		25,227,194		27,237,788			25,694,761		27,374,953
Effect of dilutive securities
Equity compensation awards		529,689		0			406,973		0
Weighted average common shares outstanding - diluted		25,756,883		27,237,788			26,101,734		27,374,953
Net income (loss) per common share - basic	$	0.53	$	(0.39	)	$	2.22	$	(3.04	)
Net income (loss) per common share - diluted	$	0.52	$	(0.39	)	$	2.18	$	(3.04	)

Excluded from the weighted average common shares outstanding calculation at September 30, 2012 and 2011 are 6,248,209 shares and 4,544,329 shares, respectively, which are held as treasury shares. The shares are excluded as of their repurchase date. For the three and nine months ended September 30, 2012, equity compensation awards to purchase 972,175 shares of common stock were excluded from the computation of diluted net income per common share as these instruments were anti-dilutive. These instruments expire at varying times from 2012 through 2019. For the three and nine months ended September 30, 2011, equity compensation awards to purchase 1,506,164 shares and 1,571,066 shares, respectively, of common stock were excluded from the computation of diluted net loss per common share because the net loss caused their effect to be anti-dilutive. These instruments expire at varying times from 2012 through 2018.

6.    Commitments and Contingencies

Argo Group’s subsidiaries are parties to legal actions incidental to their business. Based on the opinion of counsel, management believes that the resolution of these matters will not materially affect our financial condition or results of operations.

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7.    Income Taxes

We are incorporated under the laws of Bermuda and, under current Bermuda law, are not obligated to pay any taxes in Bermuda based upon income or capital gains. We have received an undertaking from the Supervisor of Insurance in Bermuda pursuant to the provisions of the Exempted Undertakings Tax Protection Act, 2011, which exempts us from any Bermuda taxes computed on profits, income or any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, at least until the year 2035.

We do not consider ourselves to be engaged in a trade or business in the United States or the United Kingdom and, accordingly, do not expect to be subject to direct United States or United Kingdom income taxation.

We have subsidiaries based in the United Kingdom that are subject to the tax laws of that country. Under current law, these subsidiaries are taxed at the applicable corporate tax rates. Six of the United Kingdom subsidiaries are deemed to be engaged in business in the United States and are therefore subject to United States corporate tax in respect of a proportion of their United States underwriting business only. Relief is available against the United Kingdom tax liabilities in respect of overseas taxes paid that arise from the underwriting business. Corporate income tax losses incurred in the United Kingdom can be carried forward, for application against future income, indefinitely. Our United Kingdom subsidiaries file separate United Kingdom income tax returns.

We have subsidiaries based in the United States that are subject to the tax laws of that country. Under current law, these subsidiaries are taxed at the applicable corporate tax rates. Our United States subsidiaries file a consolidated United States federal income tax return.

We also have operations in Belgium, Switzerland, Brazil, France, Malta, Spain and Ireland, which are subject to income taxes imposed by the jurisdiction in which they operate. We have operations in the United Arab Emirates, which are not subject to income tax under the laws of that country.

Our income tax provision includes the following components:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in millions)	2012			2011			2012		2011
Current tax provision	$	5.7		$	2.6		$	11.2	$	3.0
Deferred tax (benefit) provision related to:
Future tax deductions		(2.1	)		4.4			0.8		11.0
Valuation allowance change		0.7			(0.2	)		1.8		(0.7	)
Income tax provision	$	4.3		$	6.8		$	13.8	$	13.3

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Our expected income tax provision computed on pre-tax income (loss) at the weighted average tax rate has been calculated as the sum of the pre-tax income (loss) in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. For the three and nine months ended September 30, 2012 and 2011, pre-tax income (loss) attributable to our operations and the operations’ effective tax rates were as follows:

	For the Three Months Ended September 30,
(in millions)	2012						2011
	Pre-tax income (loss)			Effective Tax Rate			Pre-tax income (loss)			Effective Tax Rate
Bermuda	$	8.0			0.0	%	$	(24.4	)		0.0	%
United States		12.1			21.0	%		17.1			36.4	%
United Kingdom		0.1			1217.4	%		4.4			11.6	%
Belgium		0.1			20.0	%		0.1			25.5	%
Brazil		(1.9	)		0.0	%		(1.2	)		0.0	%
Dubai		0.0	(1)		0.0	%		0.0	(1)		0.0	%
Ireland		0.0			0.0	%		0.0			0.0	%
Malta		(0.7	)		0.0	%		n/a			n/a
Switzerland		0.0	(1)		25.0	%		0.0	(1)		0.0	%
Pre-tax income (loss)	$	17.7					$	(4.0	)

⁽¹⁾  Pre-tax income for the respective period was less than $0.1 million.

	For the Nine Months Ended September 30,
(in millions)	2012						2011
	Pre-tax income (loss)			Effective Tax Rate			Pre-tax income (loss)			Effective Tax Rate
Bermuda	$	18.2			0.0	%	$	(110.3	)		0.0	%
United States		45.8			22.8	%		67.4			27.9	%
United Kingdom		13.8			24.0	%		(25.2	)		22.1	%
Belgium		0.2			33.6	%		0.3			15.4	%
Brazil		(5.4	)		0.0	%		(2.2	)		0.0	%
Dubai		0.1			0.0	%		0.0	(1)		0.0	%
Ireland		(0.1	)		0.0	%		0.0			0.0	%
Malta		(1.8	)		0.0	%		n/a			n/a
Switzerland		0.0	(1)		24.0	%		0.0	(1)		23.1	%
Pre-tax income (loss)	$	70.8					$	(70.0	)

⁽¹⁾  Pre-tax income for the respective period was less than $0.1 million.

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A reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate for the three and nine months ended September 30, 2012 and 2011 is as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in millions)	2012			2011			2012			2011
Income tax provision at expected rate	$	3.3		$	7.5		$	17.0		$	17.1
Tax effect of:
Tax-exempt interest		(1.2	)		(1.4	)		(4.2	)		(4.3	)
Dividends received deduction		(0.4	)		(0.1	)		(1.3	)		(1.2	)
Valuation allowance change		0.7			(0.2	)		1.8			(0.7	)
Other permanent adjustments, net		0.1			0.9			0.8			1.8
Adjustment for annualized rate		0.0			0.9			0.0			(0.1	)
United States state tax expense (benefit)		0.0			0.1			(0.2	)		(0.3	)
Other foreign adjustments		0.0			(0.1	)		0.1			0.0
Prior year foreign taxes recovered		0.0			(0.3	)		0.0			(0.3	)
Deferred tax rate reduction		(0.6	)		(0.1	)		(0.6	)		(0.1	)
Foreign exchange adjustments		2.4			(0.4	)		0.4			1.4
Income tax provision	$	4.3		$	6.8		$	13.8		$	13.3
Income tax provision (benefit) - Foreign	$	1.8		$	0.5		$	3.4		$	(5.5	)
Income tax provision - United States Federal		2.3			6.0			10.6			19.2
Income tax provision (benefit) - United States State		0.2			0.3			(0.2	)		(0.4	)
Income tax provision	$	4.3		$	6.8		$	13.8		$	13.3

Our net deferred tax assets (liabilities) are supported by taxes paid in previous periods, the reversal of the taxable temporary differences and the recognition of future income. Management regularly evaluates the recoverability of the deferred tax assets and makes any necessary adjustments to them based upon any changes in management’s expectations of future taxable income. Realization of deferred tax assets is dependent upon our generation of sufficient taxable income in the future to recover tax benefits that cannot be recovered from taxes paid in the carryback period, which is generally two years for net operating losses and three years for capital losses for our operations in the United States. At September 30, 2012, we had a total net deferred tax asset of $2.5 million prior to any valuation allowance. Management has concluded that a valuation allowance is required for a portion of the tax effected net capital loss carryforward of $31.0 million generated from the sale of PXRE Reinsurance Company, and a full valuation allowance is required for the tax effected net operating loss carryforward of $18.7 million from PXRE Corporation and for the tax effected net operating loss carryforward of $1.0 million from ARIS Title Insurance Corporation (“ARIS”). The capital loss carryforward generated from the sale of PXRE Reinsurance Company will expire if not utilized by December 31, 2013. Of the PXRE Corporation loss carryforwards, $17.2 million will expire if not utilized by December 31, 2025 and $1.5 million will expire if not utilized by December 31, 2027. Of the ARIS loss carryforward, $0.2 million will expire if not utilized by December 31, 2027, $0.4 million will expire if not utilized by December 31, 2028 and $0.4 million will expire if not utilized by December 31, 2029. The valuation allowances have been established as Internal Revenue Code Section 382 limits the utilization of net operating loss and net capital loss carryforwards following an ownership change. Accordingly, a valuation allowance of $52.2 million is required as of September 30, 2012. The loss carryforwards available to utilize per year are $2.8 million as required by Internal Revenue Code Section 382. For the nine months ended September 30, 2012, the valuation allowance was reduced by $0.7 million pertaining to the utilization of the PXRE and ARIS loss carryforwards, was increased by $0.7 million pertaining to the Malta operations and was increased by $1.8 million pertaining to the Brazil operations.

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We have no material unrecognized tax benefits as of September 30, 2012. Our United States subsidiaries are no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2008. Our United Kingdom subsidiaries are no longer subject to United Kingdom income tax examinations by Her Majesty’s Revenue and Customs for years before 2008.

8.     Share-based Compensation

The fair value method of accounting is used for equity-based compensation plans. Under the fair value method, compensation cost is measured based on the fair value of the award at the measurement date and recognized over the requisite service period. We use the Black-Scholes model to estimate the fair values on the measurement date for share options and share appreciation rights (“SARs”). The Black-Scholes model uses several assumptions to value a share award. The volatility assumption is based on the historical change in Argo Group’s stock price over the previous five years preceding the measurement date. The risk-free rate of return assumption is based on the five-year U.S. Treasury constant maturity rate on the measurement date. The expected award life is based upon the average holding period over the history of the incentive plan. The following table summarizes the assumptions we used for the nine months ended September 30, 2012 and 2011:

	2012	2011
Risk-free rate of return	0.68% to 1.11%	0.89% to 2.07%
Expected dividend yields	1.63% to 1.67%	1.37% to 1.54%
Expected award life (years)	5.03 to 5.04	5.04 to 5.07
Expected volatility	32.5% to 32.8%	32.1% to 32.5%

Argo Group’s 2007 Long-Term Incentive Plan

In November 2007, the shareholders of Argo Group approved the 2007 Long-Term Incentive Plan (the “2007 Plan”), which provides for an aggregate of 4.5 million shares of our common stock that may be issued to certain executives, non-employee directors and other key employees. The share awards may be in the form of share options, SARs, restricted shares, restricted share units, performance units, performance shares or other share-based incentive awards. Shares issued under this plan may be shares that are authorized and unissued or shares that we reacquired, including shares purchased on the open market. Share options and SARs will count as one share for the purposes of the limits under the 2007 Plan; restricted shares, restricted share units, performance units, performance shares or other share-based incentive awards that settle in common shares will count as 2.75 shares for purpose of the limits under the 2007 Plan.

Share options may be in the form of incentive share options, non-qualified share options and restorative options. Share options are required to have an exercise price that is not less than the market value on the date of grant. We are prohibited from repricing the options. The term of the share options cannot exceed seven years from the grant date.

A summary of option activity under the 2007 Plan as of September 30, 2012, and changes during the nine months then ended is as follows:

	Shares			Weighted-Average Exercise Price
Outstanding at January 1, 2012		411,314		$	36.70
Granted		0		$	0.00
Exercised		0		$	0.00
Expired or forfeited		(5,731	)	$	35.29
Outstanding at September 30, 2012		405,583		$	36.72

Options outstanding under this plan vest over a one to five year period, subject to continued employment. Expense recognized under this plan for share options was $0.5 million and $0.9 million for the nine months ended September 30, 2012 and 2011, respectively. Compensation expense from all equity-based compensation awards is included in “Underwriting, acquisition and insurance expense” in the accompanying Consolidated Statements of Income (Loss). Unamortized expense for these options was $0.1 million as of September 30, 2012.

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A summary of restricted share activity under the 2007 Plan as of September 30, 2012, and changes during the nine months then ended is as follows:

	Shares			Weighted-Average Grant Date Fair Value
Outstanding at January 1, 2012		148,373		$	31.09
Granted		163,598		$	29.64
Vested and issued		(43,277	)	$	32.64
Expired or forfeited		(26,177	)	$	32.56
Outstanding at September 30, 2012		242,517		$	30.16

The restricted shares will vest over two to four years. Expense recognized under this plan for the restricted shares was $1.4 million and $1.1 million for the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012, there was $6.0 million of total unrecognized compensation cost related to restricted shares.

A summary of stock-settled SARs activity under the 2007 Plan as of September 30, 2012, and changes during the nine months then ended is as follows:

	Shares			Weighted-Average Exercise Price
Outstanding at January 1, 2012		927,225		$	30.18
Granted		370,720		$	29.59
Exercised		(2,764	)	$	28.01
Expired or forfeited		(142,255	)	$	32.26
Outstanding at September 30, 2012		1,152,926		$	29.74

The stock-settled SARs vest over a one to four year period. Upon exercise of the stock-settled SARs, the employee is entitled to receive shares of our common stock equal to the appreciation of the stock as compared to the exercise price. Expense recognized for the stock-settled SARs was $1.7 million and $1.0 million for the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012, there was $4.7 million of total unrecognized compensation cost related to stock-settled SARs.

A summary of cash-settled SARs activity under the 2007 Plan as of September 30, 2012, and changes during the nine months then ended is as follows:

	Shares			Weighted-Average Exercise Price
Outstanding at January 1, 2012		1,086,043		$	30.38
Granted		829,278		$	29.65
Exercised		(14,199	)	$	28.04
Expired or forfeited		(117,518	)	$	31.92
Outstanding at September 30, 2012		1,783,604		$	29.95

The cash-settled SARs vest over a one to four year period. Upon exercise of the cash-settled SARs, the employee is entitled to receive cash payment for the appreciation in the value of our common stock over the exercise price. We are accounting for the cash-settled SARs as liability awards, which require the awards to be re-valued at each reporting period. Expense recognized for the cash-settled SARs totaled $3.6 million for the nine months ended September 30, 2012. Due to the decline in our stock price from December 31, 2010 to September 30, 2011, the revaluation of the cash-settled SARs resulted in a $1.3 million reduction to expense for the nine months ended September 30, 2011. As of September 30, 2012, there was $6.9 million of total unrecognized compensation cost related to cash-settled SARs.

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Argo Group International Holdings Ltd. Deferred Compensation Plan for Non-Employee Directors

In February 2008, the Board of Directors approved the Argo Group International Holdings, Ltd. Deferred Compensation Plan for Non-Employee Directors (“Directors Plan”), a non-funded and non-qualified deferred compensation plan. Under the Directors Plan, non-employee directors can elect each year to defer payment of 50% or 100% of their cash compensation payable during the next calendar year. During the time that the cash compensation amounts are deferred, such amounts are credited with interest earned at a rate two percent above the prime rate, to be re-set each May 1. In addition, the Directors Plan calls for us to grant a match equal to 75% of the cash compensation amounts deferred in the form of “Stock Units,” which provide directors with the economic equivalent of stock ownership and are credited as a bookkeeping entry to each director’s “Stock Unit Account.” Each Stock Unit is valued at the closing price of our common stock on the national exchange on which it is listed as of the date credited for all purposes under the Directors Plan and fluctuates daily thereafter on that same basis. Distributions from the Directors Plan will occur six months after the non-employee director ceases to be a member of the Board due to retirement or termination without cause or change in control, or immediately upon disability or death. The non-employee directors are responsible for all tax requirements on the deferred compensation and any related earnings. The Directors Plan provides for a Stock Unit Account to be established for each non-employee director upon their election to the Board and credits their account with an initial bookkeeping entry for 1,650 Stock Units. Under the Directors Plan, we recorded compensation expense of $0.9 million and $0.4 million for the nine months ended September 30, 2012 and 2011, respectively.

Argonaut Group’s Amended and Restated Stock Incentive Plan

Argonaut Group, Inc.’s Amended and Restated Stock Incentive Plan, as approved by the shareholders (the “Amended Plan”), provided for an aggregate of up to 6,250,000 shares of our common stock that may be issued to certain executives and other key employees. The stock awards were issued in the form of non-qualified stock options and non-vested stock.

A summary of option activity under the Amended Plan as of September 30, 2012, and changes during the nine months then ended is as follows:

	Shares			Weighted-Average Exercise Price
Outstanding at January 1, 2012		408,671		$	35.93
Granted		0		$	0.00
Exercised		(10,097	)	$	23.29
Expired or forfeited		(179,190	)	$	34.99
Outstanding at September 30, 2012		219,384		$	37.29

All options granted under the Amended Plan were fully vested in August 2011.

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9.    Reserves for Losses and Loss Adjustment Expenses

The following table provides a reconciliation of reserves for losses and loss adjustment expenses (“LAE”), net of reinsurance, to the gross amounts reported in the Consolidated Balance Sheets. Reinsurance recoverables in this note exclude paid loss recoverables of $106.5 million and $148.5 million as of September 30, 2012 and 2011, respectively:

	For the Nine Months Ended September 30,
(in millions)	2012			2011
Net reserves beginning of the year	$	2,336.7		$	2,253.0
Add:
Net reserves from assumed retroactive insurance contract(1)		13.0			0.0
Losses and LAE incurred during current calendar year, net of reinsurance:
Current accident year		545.7			662.8
Prior accident years		(17.8	)		1.6
Losses and LAE incurred during calendar year, net of reinsurance		527.9			664.4
Deduct:
Losses and LAE payments made during current calendar year, net of reinsurance:
Current accident year		111.9			153.2
Prior accident years		450.1			417.1
Losses and LAE payments made during current calendar year, net of reinsurance:		562.0			570.3
Change in participation interest(2)		(3.1	)		31.2
Foreign exchange adjustments		5.4			12.0
Net reserves - end of period		2,317.9			2,390.3
Add:
Reinsurance recoverables on unpaid losses and LAE, end of period		910.0			959.3
Gross reserves - end of period	$	3,227.9		$	3,349.6

⁽¹⁾  Amount represents reserves assumed resulting from participation in Brazilian Motor Third-Party Liability Insurance Pool effective January 1, 2012.

⁽²⁾ Amount represents (decrease) increase in reserves due to change in syndicate participation.

Included in losses and LAE for the nine months ended September 30, 2012 was $17.8 million in favorable prior years’ loss reserve development comprised of the following: $33.5 million of favorable development in the Excess and Surplus Lines segment primarily driven by $23.6 million of favorable development in the general and products liability lines of business in accident years 2009 and prior, $3.1 million of favorable development in the property lines, primarily in accident year 2010 and $2.4 million of favorable development in the automobile liability lines of business, primarily in accident year 2009; $18.6 million of net unfavorable development in the Commercial Specialty segment driven by $24.9 million of unfavorable development in general liability due to increases in claim severity, $3.8 million of unfavorable development in the automobile liability lines of business, partially offset by $7.7 million of favorable development in workers compensation and $2.4 million of favorable development in short-tail lines; $4.5 million of net favorable development in the International Specialty segment primarily driven by $5.0 million of favorable development attributable to short-tail non-catastrophe losses, $0.3 million of favorable development in

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long-tail professional liability, partially offset by $0.8 million of unfavorable development related to short-tail catastrophe losses primarily due to the 2011 catastrophe events; $4.4 million of net favorable development in the Syndicate 1200 segment primarily driven by favorable development in the property facultative class of business, partially offset by unfavorable development in the general liability class of business; and $6.0 million of net unfavorable development in the Run-off Lines segment primarily due to $5.5 million of unfavorable development in asbestos driven by increasing defense costs, unfavorable development in other run-off lines, partially offset by favorable development in workers compensation and legacy PXRE claims.

Included in losses and LAE for the nine months ended September 30, 2011 was $1.6 million in unfavorable prior years’ loss reserve development comprised of the following: $17.8 million of favorable development in the Excess and Surplus Lines segment resulting from $13.2 million of favorable development in the general and products liability lines of business, $3.4 million of favorable development in the automobile liability lines of business and $1.2 million of favorable development primarily in the professional liability and property lines of business; $4.7 million of net unfavorable development in the Commercial Specialty segment primarily driven by $12.1 million of unfavorable development in general liability due primarily to increases in claim severity, partially offset by $4.1 million of favorable development in workers compensation and $3.7 million of favorable development in an assumed Directors and Officers program; $3.6 million of net favorable development in the International Specialty segment comprised of $3.9 million of favorable development attributable to short-tail non-catastrophe losses, $1.1 million of favorable development related to 2005 Hurricanes Ike and Gustav, partially offset by $1.4 million of unfavorable development attributable to the 2010 New Zealand earthquake; $14.8 million of unfavorable development in the Syndicate 1200 segment primarily attributable to $10.1 million of unfavorable development in the liability lines of business driven by deterioration in the professional indemnity and general liability classes of business related to a small number of specific claims and a reduction in the estimate of future reinsurance recoveries, coupled with $4.6 million of unfavorable development related to property lines of business where the claims experience was worse than expected; and $3.5 million of net unfavorable development in the Run-off Lines segment primarily due to $11.7 million of unfavorable development in asbestos and environmental lines, partially offset by the collection of a contribution settlement from another insurer for a California workers compensation indemnity claim, and favorable development in other lines. The asbestos and environmental unfavorable development is primarily attributable to $8.2 million for asbestos losses driven by increasing severities, defense costs and the settlement of a disputed reinsurance recoverable matter, and $3.5 million for environmental losses driven by one significant enviromental loss.

In the opinion of management, our reserves represent the best estimate of our ultimate liabilities, based on currently known facts, current law, current technology and assumptions considered reasonable where facts are not known. Due to the significant uncertainties and related management judgments, there can be no assurance that future loss development, favorable or unfavorable, will not occur.

10.    Derivative Instruments

Through our subsidiary Argo Re, in 2011 we entered into two reinsurance contracts with a special purpose reinsurance company that provides us with protection against certain severe catastrophe events and the occurrence of multiple significant catastrophe events during the same year. The first contract was effective June 18, 2011 and provides coverage of $100 million for hurricanes and earthquakes in the U.S., windstorms in Europe, and earthquakes in Japan based on the occurrence of second and subsequent events on a per-occurrence basis over an 18-month coverage period. Each event has an activation level, which, if attained, puts the notes on risk for a subsequent event. Once the coverage has been activated, a second loss during the Coverage Period in excess of the loss trigger level results in a loss to the note holders. The second contract entered into on December 28, 2011 and effective January 1, 2012, provides coverage of $100 million for hurricanes and earthquakes (including fire) in the U.S. and covers losses for the first and subsequent events on a per-occurrence basis over a 24-month coverage period. Both of these transactions ignore the effects of inuring reinsurance, creating the remote possibility of a double recovery on covered events, and are therefore deemed to be derivatives.

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We recorded these contracts at fair value, and such fair value is included in “Other assets” in our Consolidated Balance Sheets with any changes in the value reflected in “Other reinsurance-related expenses” in the Consolidated Statements of Income (Loss). As there is no quoted fair value available for these derivatives, the fair value was estimated by management taking into account changes in the market for catastrophe bond reinsurance contracts with similar economic characteristics and potential recoveries from events preceding the valuation date. The amount recognized could be materially different from the actual recoveries received under this contract. Included in “Other reinsurance-related expenses” for the three and nine months ended September 30, 2012 was $7.0 million and $20.8 million, respectively, and $2.7 million and $3.1 million for the three and nine months ended September 30, 2011, respectively. The expense in each respective period was due to the change in the fair value of the derivative(s), principally due to the passage of the transaction’s risk coverage term. Included in “Other assets” in our Consolidated Balance Sheets were $6.4 million and $9.0 million, which represent the fair value of these contracts at September 30, 2012 and December 31, 2011, respectively.

The special purpose reinsurance company that is the counterparty to this transaction is a variable interest entity under the provisions of the FASB Accounting Standards Codification Topic 810-10. Argo Group is not the primary beneficiary of this entity and is therefore not required to consolidate it in its consolidated financial statements.

11.    Underwriting, Acquisition and Insurance Expenses

Underwriting, acquisition and insurance expenses for the three and nine months ended September 30, 2012 and 2011 were as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in millions)	2012			2011			2012			2011
Commissions	$	55.3		$	49.0		$	156.0		$	143.1
General expenses		60.2			51.0			182.2			153.1
Premium taxes, boards and bureaus		7.1			8.0			19.2			19.7
		122.6			108.0			357.4			315.9
Net deferral of policy acquisition costs		(4.6	)		(3.8	)		(11.1	)		(1.2	)
Total underwriting, acquisition and insurance expenses	$	118.0		$	104.2		$	346.3		$	314.7

Underwriting, acquisition and insurance expenses increased for the nine months ended September 30, 2012 due primarily to an increase in the participation percentage of the Lloyd’s Syndicate 1200 and cost associated with our start up operations primarily in Brazil. Included in general expenses for the nine months ended September 30, 2011 is $4.0 million of expense to write-off certain uncollectible balances in reinsurance recoverables on paid losses. Partially offsetting these expenses were a recovery of $0.9 million for reinsurance recoverable amounts previously written off and a reversal of $0.9 million to adjust the allowances for doubtful accounts on premiums receivable and reinsurance recoverable on paid losses.

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12.    Segment Information

We are primarily engaged in underwriting property and casualty insurance and reinsurance. We have four ongoing reporting segments: Excess and Surplus Lines, Commercial Specialty, International Specialty and Syndicate 1200. Additionally, we have a Run-off Lines segment for certain products that we no longer write.

We consider many factors, including the nature of each segment’s insurance and reinsurance products, production sources, distribution strategies and the regulatory environment, in determining how to aggregate reporting segments.

In evaluating the operating performance of our segments, we focus on core underwriting and investing results before the consideration of realized gains or losses from the sales of investments. Realized investment gains (losses) are reported as a component of the Corporate and Other segment, as decisions regarding the acquisition and disposal of securities reside with the investment function and are not under the control of the individual business segments. Identifiable assets by segment are those assets used in the operation of each segment.

Revenue and income (loss) before income taxes for each segment for the three and nine months ended September 30, 2012 and 2011 were as follows:

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
(in millions)	2012		2011			2012		2011
Revenue:
Earned premiums
Excess and Surplus Lines	$	100.8	$	99.5		$	295.5	$	305.8
Commercial Specialty		78.6		82.9			241.8		233.7
International Specialty		33.4		21.3			90.8		76.0
Syndicate 1200		90.8		67.3			242.3		188.2
Run-off Lines		0.7		(0.1	)		1.4		0.3
Total earned premiums		304.3		270.9			871.8		804.0
Net investment income
Excess and Surplus Lines		12.5		13.4			38.5		42.8
Commercial Specialty		6.7		6.6			20.6		21.0
International Specialty		3.1		2.4			10.0		8.1
Syndicate 1200		3.8		4.3			11.4		13.3
Run-off Lines		2.8		3.1			9.8		10.4
Corporate and Other		0.0		0.2			0.0		0.7
Total net investment income		28.9		30.0			90.3		96.3
Fee income, net		3.0		1.4			4.8		1.8
Net realized investment gains		8.3		3.9			18.7		37.7
Total revenue	$	344.5	$	306.2		$	985.6	$	939.8

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	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in millions)	2012			2011			2012			2011
Income (loss) before income taxes
Excess and Surplus Lines	$	15.1		$	21.1		$	56.3		$	41.6
Commercial Specialty		(2.7	)		(1.2	)		(11.8	)		(7.3	)
International Specialty		6.6			(13.1	)		22.0			(63.9	)
Syndicate 1200		11.8			(4.7	)		18.0			(49.0	)
Run-off Lines		(2.5	)		(5.8	)		(1.5	)		(2.0	)
Total segment income (loss) before taxes		28.3			(3.7	)		83.0			(80.6	)
Corporate and Other		(18.9	)		(4.2	)		(30.9	)		(27.1	)
Net realized investment gains		8.3			3.9			18.7			37.7
Total income (loss) before income taxes	$	17.7		$	(4.0	)	$	70.8		$	(70.0	)

“Earned premiums” and “Total revenue” for the three and nine months ended September 30, 2011 in the above table will not agree to our quarterly report on Form 10-Q filed in 2011. At December 31, 2011, derivative accounting was applied to two reinsurance contracts. The expense for these contracts is now reflected in “Other reinsurance-related expenses” in the Consolidated Statements of Income (Loss). In the previously filed Quarterly Report, the expense was reflected as a reduction to earned premiums. See Note 10, “Derivative Instruments,” for additional information on these transactions.

The table below presents the split of earned premiums by geographic location for the three and nine months ended September 30, 2012 and 2011. For this disclosure, we determine geographic location by the country of domicile of our subsidiaries that write the business and not by the location of insureds or reinsureds from whom the business was generated.

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in millions)	2012		2011		2012		2011
Bermuda	$	32.6	$	21.2	$	83.5	$	76.3
Brazil		6.7		0.0		18.4		0.0
Malta		0.0		0.0		0.1		0.0
United Kingdom		84.9		67.3		231.1		188.2
United States		180.1		182.4		538.7		539.5
Total earned premiums	$	304.3	$	270.9	$	871.8	$	804.0

The following table represents identifiable assets as of September 30, 2012 and December 31, 2011:

	September 30,		December 31,
(in millions)	2012		2011
Excess and Surplus Lines	$	2,250.9	$	2,271.1
Commercial Specialty		1,307.3		1,285.4
International Specialty		736.7		694.7
Syndicate 1200		1,578.5		1,544.5
Run-off Lines		547.7		523.7
Corporate and Other		228.7		58.9
Total	$	6,649.8	$	6,378.3

Included in Corporate and Other at September 30, 2012 is $121.1 million in short-term investments and $18.2 million in cash from the issuance of senior unsecured fixed rate notes.

Included in total assets at September 30, 2012 and December 31, 2011 are $440.9 million and $548.2 million, respectively, in assets associated with trade capital providers.

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13. Supplemental Cash Flow Information

Income taxes paid. We paid income taxes of $18.1 million and $15.3 million during the nine months ended September 30, 2012 and 2011, respectively.

Income taxes recovered.No income taxes were recovered during the nine months ended September 30, 2012. During the same period in 2011, $0.2 million of income taxes was recovered.

Interest paid. Interest paid for the nine months ended September 30, was as follows:

	For the Nine Months Ended September 30,
(in millions)	2012		2011
Junior subordinated debentures	$	16.3	$	15.9
Other indebtedness		2.5		2.8
Total interest paid	$	18.8	$	18.7

14. Disclosures about Fair Value of Financial Instruments

Cash. The carrying amount approximates fair value.

Investment securities and short-term investments. See Note 3, “Investments,” for additional information.

Premiums receivable and reinsurance recoverables on paid losses. The carrying value of current receivables approximates fair value. At September 30, 2012 and December 31, 2011, the carrying values of premiums receivable over 90 days were $28.6 million and $19.3 million, respectively. Included in “Reinsurance recoverables” in the Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, are amounts that are due from third party trade capital providers associated with the operations of Argo Underwriting Agency Limited (“Argo International”). Upon settlement, the receivable is offset against the liability also reflected in the accompanying Consolidated Balance Sheets. At September 30, 2012 and December 31, 2011, the payable was in excess of the receivable. Of our paid losses on reinsurance recoverable balances, excluding amounts attributable to Argo International’s third party trade capital providers, at September 30, 2012 and December 31, 2011, the carrying values over 90 days were $14.4 million and $12.0 million, respectively. Our methodology for establishing our allowances for doubtful accounts includes specifically identifying all potential uncollectible balances regardless of aging. Any of the over 90 day balances, where collectibility was deemed questionable, have been included in the allowances. The allowance for doubtful accounts for premiums receivable was $2.5 million and $2.8 million at September 30, 2012 and December 31, 2011, respectively. The allowance for doubtful accounts for reinsurance recoverables on paid losses was $2.3 million and $3.2 million at September 30, 2012 and December 31, 2011, respectively. Premiums receivable over 90 days were secured by collateral in the amount of $0.5 million and $0.3 million at September 30, 2012 and December 31, 2011, respectively. Reinsurance recoverables on paid losses over 90 days were secured by collateral in the amount of $0.2 million and $0.3 million at September 30, 2012 and December 31, 2011, respectively.

Long-term debt. At September 30, 2012 and December 31, 2011, the fair value of our Junior Subordinated Debentures was estimated using quoted prices from external sources based on current market conditions.

Senior unsecured fixed rate notes.At September 30, 2012, the fair value of our Senior Unsecured Fixed Rate Notes was estimated using quoted prices from external sources based on current market conditions.

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Other indebtedness.At September 30, 2012 and December 31, 2011, the fair value of our Other Indebtedness was estimated using quoted prices from external sources based on current market conditions.

A summary of our financial instruments whose carrying value did not equal fair value at September 30, 2012 and December 31, 2011 is shown below:

	September 30, 2012				December 31, 2011
(in millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Junior subordinated debentures	$	311.5	$	252.2	$	311.5	$	250.8
Senior unsecured fixed rate notes		143.8		143.8		0.0		0.0
Other indebtedness:
Floating rate loan stock		63.7		46.5		64.7		46.8
Note payable		0.8		0.6		0.8		0.6
	$	519.8	$	443.1	$	377.0	$	298.2

15. Information Provided in Connection with Outstanding Debt of Subsidiaries

In September 2012, through our wholly owned subsidiary Argo Group US, we issued $125,000,000 aggregate principal amount of Argo Group US’s 6.5% Senior Notes due September 15, 2042 (the “Notes”). Subsequently on September 25, 2012, the underwriters of the offering exercised their option to purchase an additional $18,750,000 aggregate principal amount of Notes, which were issued on September 26, 2012. The Notes bear interest at 6.5%, payable quarterly in cash in arrears on the 15th day of March, June, September and December of each year, beginning on December 15, 2012. The Notes are unsecured and unsubordinated obligations of Argo Group US and rank equally in right of payment with all of Argo Group US’s other unsecured and unsubordinated debt. The Notes are guaranteed on a full and unconditional senior unsecured basis by Argo Group. The Notes may be redeemed, for cash, in whole or in part, on or after September 15, 2017, at Argo Group US’s option, at any time and from time to time, until 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.

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The following tables present condensed consolidating financial information at September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and 2011, for Argo Group (the “Parent Guarantor”) and Argo Group US (the “Subsidiary Issuer”). The Subsidiary Issuer is an indirect 100 percent-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, results of operations, and cash flows of operating insurance company subsidiaries.

CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2012

(in millions)

	Argo Group International Holdings, Ltd (Parent Guarantor)		Argo Group US, Inc. and Subsidiaries (Subsidiary Issuer)		Other Subsidiaries and Eliminations (1)			Consolidating Adjustments (2)			Total
Assets
Investments	$	3.0	$	2,925.7	$	1,416.2		$	0.0		$	4,344.9
Cash		0.1		127.8		14.8			0.0			142.7
Premiums receivable		0.0		153.2		249.7			0.0			402.9
Reinsurance recoverables		0.0		1,143.3		(126.8	)		0.0			1,016.5
Goodwill and other intangible assets		0.0		136.1		106.1			0.0			242.2
Current income taxes receivable, net		0.0		7.1		14.2			0.0			21.3
Deferred acquisition costs, net		0.0		57.3		50.4			0.0			107.7
Ceded unearned premiums		0.0		88.9		124.1			0.0			213.0
Other assets		4.4		106.2		48.0			0.0			158.6
Due from affiliates		0.0		0.7		(0.7	)		0.0			0.0
Intercompany note receivable		0.0		102.9		(102.9	)		0.0			0.0
Investment in subsidiaries		1,640.2		0.0		0.0			(1,640.2	)		0.0
Total assets	$	1,647.7	$	4,849.2	$	1,793.1		$	(1,640.2	)	$	6,649.8
Liabilities and Shareholders’ Equity
Reserves for losses and loss adjustment expenses	$	0.0	$	2,238.4	$	989.5		$	0.0		$	3,227.9
Unearned premiums		0.0		432.0		355.0			0.0			787.0
Funds held and ceded reinsurance payable, net		0.0		579.8		(182.1	)		0.0			397.7
Long-term debt		64.4		391.6		63.8			0.0			519.8
Deferred tax liabilities, net		0.0		42.8		6.9			0.0			49.7
Accrued underwriting expenses and other liabilities		10.6		81.0		34.2			0.0			125.8
Due to affiliates		3.6		0.0		0.0			(3.6	)		0.0
Intercompany note payable		27.2		25.0		(25.0	)		(27.2	)		0.0
Total liabilities		105.8		3,790.6		1,242.3			(30.8	)		5,107.9
Total shareholders’ equity		1,541.9		1,058.6		550.8			(1,609.4	)		1,541.9
Total liabilities and shareholders’ equity	$	1,647.7	$	4,849.2	$	1,793.1		$	(1,640.2	)	$	6,649.8

⁽¹⁾ Includes all other subsidiaries of Argo Group International Holdings, Ltd and all intercompany eliminations

⁽²⁾ Includes all Argo Group parent company eliminations

34

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2011

(in millions)

	Argo Group International Holdings, Ltd (Parent Guarantor)			Argo Group US, Inc. and Subsidiaries (Subsidiary Issuer)		Other Subsidiaries and Eliminations (1)			Consolidating Adjustments (2)			Total
Assets
Investments	$	(0.8	)	$	2,778.5	$	1,369.8		$	0.0			4,147.5
Cash		0.0			85.1		15.8			0.0			100.9
Premiums receivable		0.0			151.2		157.8			0.0			309.0
Reinsurance recoverables		0.0			1,140.5		3.6			0.0			1,144.1
Goodwill and other intangible assets		0.0			137.2		109.6			0.0			246.8
Current income taxes receivable, net		0.0			0.0		11.2			0.0			11.2
Deferred acquisition costs, net		0.0			55.8		45.7			0.0			101.5
Ceded unearned premiums		0.0			77.2		102.2			0.0			179.4
Other assets		6.8			88.5		42.6			0.0			137.9
Due from affiliates		0.0			0.0		0.3			(0.3	)		0.0
Intercompany note receivable		0.0			90.8		(90.8	)		0.0			0.0
Investment in subsidiaries		1,530.6			0.0		0.0			(1,530.6	)		0.0
Total assets	$	1,536.6		$	4,604.8	$	1,767.8		$	(1,530.9	)	$	6,378.3
Liabilities and Shareholders’ Equity
Reserves for losses and loss adjustment expenses	$	0.0		$	2,291.2	$	999.9		$	0.0		$	3,291.1
Unearned premiums		0.0			397.8		260.4			0.0			658.2
Funds held and ceded reinsurance payable, net		0.0			562.8		(102.5	)		0.0			460.3
Long-term debt		64.4			247.9		64.7			0.0			377.0
Current income taxes payable, net		0.0			1.8		(1.8	)		0.0			0.0
Deferred tax liabilities, net		0.0			13.4		5.1			0.0			18.5
Accrued underwriting expenses and other liabilities		8.9			81.7		19.6			0.0			110.2
Due to affiliates		0.3			0.6		(0.6	)		(0.3	)		0.0
Total liabilities		73.6			3,597.2		1,244.8			(0.3	)		4,915.3
Total shareholders’ equity		1,463.0			1,007.6		523.0			(1,530.6	)		1,463.0
Total liabilities and shareholders’ equity	$	1,536.6		$	4,604.8	$	1,767.8		$	(1,530.9	)	$	6,378.3

⁽¹⁾ Includes all other subsidiaries of Argo Group International Holdings, Ltd and all intercompany eliminations

⁽²⁾ Includes all Argo Group parent company eliminations

35

CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012

(in millions)

	Argo  Group International Holdings,  Ltd (Parent Guarantor)			Argo Group US,  Inc. and Subsidiaries (Subsidiary Issuer)			Other Subsidiaries and  Eliminations (1)			Consolidating Adjustments (2)			Total
Premiums and other revenue:
Earned premiums	$	0.0		$	108.1		$	196.2		$	0.0		$	304.3
Net investment income		0.0			21.2			7.8			(0.1	)		28.9
Fee income, net		0.0			2.4			0.6			0.0			3.0
Net realized investment (losses) gains		(0.5	)		4.2			4.6			0.0			8.3
Total revenue		(0.5	)		135.9			209.2			(0.1	)		344.5
Expenses:
Losses and loss adjustment expenses		0.0			78.0			108.3			0.0			186.3
Other reinsurance-related expenses		0.0			0.0			7.0			0.0			7.0
Underwriting, acquisition and insurance expenses		10.1			41.8			66.1			0.0			118.0
Interest expense		0.1			4.1			1.7			(0.1	)		5.8
Foreign currency exchange (gain) loss		0.0			(0.1	)		9.8			0.0			9.7
Total expenses		10.2			123.8			192.9			(0.1	)		326.8
(Loss) income before income taxes		(10.7	)		12.1			16.3			0.0			17.7
Provision for income taxes		0.0			2.5			1.8			0.0			4.3
Net (loss) income before equity in earnings of subsidiaries		(10.7	)		9.6			14.5			0.0			13.4
Equity in undistributed earnings of subsidiaries		24.1			0.0			0.0			(24.1	)		0.0
Net income (loss)	$	13.4		$	9.6		$	14.5		$	(24.1	)	$	13.4
(1)      Includes all other subsidiaries of Argo Group International Holdings, Ltd and all intercompany eliminations
(2)      Includes all Argo Group parent company eliminations
CONDENSED CONSOLIDATING STATEMENT OF (LOSS) INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 (in millions)
	Argo  Group International Holdings, Ltd (Parent Guarantor)			Argo Group US, Inc. and Subsidiaries (Subsidiary Issuer)			Other Subsidiaries and  Eliminations (1)			Consolidating Adjustments (2)			Total
Premiums and other revenue:
Earned premiums	$	0.0		$	111.9		$	159.0		$	0.0		$	270.9
Net investment income		0.0			21.6			8.8			(0.4	)		30.0
Fee income, net		0.0			0.9			0.5			0.0			1.4
Net realized investment gains		0.0			2.2			1.7			0.0			3.9
Total revenue		0.0			136.6			170.0			(0.4	)		306.2
Expenses:
Losses and loss adjustment expenses		0.0			77.7			121.9			0.0			199.6
Other reinsurance-related expenses		0.0			0.0			2.7			0.0			2.7
Underwriting, acquisition and insurance expenses		4.7			38.0			61.5			0.0			104.2
Interest expense		1.3			3.8			0.9			(0.4	)		5.6
Foreign currency exchange gain		0.0			0.0			(1.9	)		0.0			(1.9	)
Total expenses		6.0			119.5			185.1			(0.4	)		310.2
(Loss) income before income taxes		(6.0	)		17.1			(15.1	)		0.0			(4.0	)
Provision for income taxes		0.0			6.3			0.5			0.0			6.8
Net (loss) income before equity in losses of subsidiaries		(6.0	)		10.8			(15.6	)		0.0			(10.8	)
Equity in undistributed losses of subsidiaries		(4.8	)		0.0			0.0			4.8			0.0
Net (loss) income	$	(10.8	)	$	10.8		$	(15.6	)	$	4.8		$	(10.8	)

⁽¹⁾ Includes all other subsidiaries of Argo Group International Holdings, Ltd and all intercompany eliminations

⁽²⁾ Includes all Argo Group parent company eliminations

36

CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

(in millions)

	Argo  Group International Holdings, Ltd (Parent Guarantor)			Argo Group US, Inc. and Subsidiaries (Subsidiary Issuer)			Other Subsidiaries and  Eliminations (1)			Consolidating Adjustments (2)			Total
Premiums and other revenue:
Earned premiums	$	0.0		$	327.0		$	544.8		$	0.0		$	871.8
Net investment income		0.1			65.3			25.1			(0.2	)		90.3
Fee income, net		0.0			2.4			2.4			0.0			4.8
Net realized investment (losses) gains		(0.5	)		11.8			7.4			0.0			18.7
Total revenue		(0.4	)		406.5			579.7			(0.2	)		985.6
Expenses:
Losses and loss adjustment expenses		0.0			220.9			307.0			0.0			527.9
Other reinsurance-related expense		0.0			0.0			20.8			0.0			20.8
Underwriting, acquisition and insurance expenses		21.4			127.9			197.0			0.0			346.3
Interest expense		2.9			11.8			2.5			(0.2	)		17.0
Foreign currency exchange loss		0.0			0.1			2.7			0.0			2.8
Total expenses		24.3			360.7			530.0			(0.2	)		914.8
(Loss) income before income taxes		(24.7	)		45.8			49.7			0.0			70.8
Provision for income taxes		0.0			10.4			3.4			0.0			13.8
Net (loss) income before equity in earnings of subsidiaries		(24.7	)		35.4			46.3			0.0			57.0
Equity in undistributed earnings of subsidiaries		81.7			0.0			0.0			(81.7	)		0.0
Net income (loss)	$	57.0		$	35.4		$	46.3		$	(81.7	)	$	57.0
(1)      Includes all other subsidiaries of Argo Group International Holdings, Ltd and all intercompany eliminations
(2)      Includes all Argo Group parent company eliminations
CONDENSED CONSOLIDATING STATEMENT OF (LOSS) INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 (in millions)
	Argo  Group International Holdings, Ltd (Parent Guarantor)			Argo Group US, Inc. and Subsidiaries (Subsidiary Issuer)			Other Subsidiaries and  Eliminations (1)			Consolidating Adjustments (2)			Total
Premiums and other revenue:
Earned premiums	$	0.0		$	330.0		$	474.0		$	0.0		$	804.0
Net investment income		0.1			67.3			30.2			(1.3	)		96.3
Fee income, net		0.0			0.4			1.4			0.0			1.8
Net realized investment gains		0.0			25.7			12.0			0.0			37.7
Total revenue		0.1			423.4			517.6			(1.3	)		939.8
Expenses:
Losses and loss adjustment expenses		0.0			223.5			440.9			0.0			664.4
Other reinsurance-related expense		0.0			0.0			3.1			0.0			3.1
Underwriting, acquisition and insurance expenses		16.0			123.6			175.1			0.0			314.7
Interest expense		4.1			11.6			2.1			(1.3	)		16.5
Foreign currency exchange (gain) loss		0.0			(0.5	)		11.6			0.0			11.1
Total expenses		20.1			358.2			632.8			(1.3	)		1,009.8
(Loss) income before income taxes		(20.0	)		65.2			(115.2	)		0.0			(70.0	)
Provision (benefit) for income taxes		0.0			18.0			(4.7	)		0.0			13.3
Net (loss) income before equity in losses of subsidiaries		(20.0	)		47.2			(110.5	)		0.0			(83.3	)
Equity in undistributed losses of subsidiaries		(63.3	)		0.0			0.0			63.3			0.0
Net (loss) income	$	(83.3	)	$	47.2		$	(110.5	)	$	63.3		$	(83.3	)

⁽¹⁾ Includes all other subsidiaries of Argo Group International Holdings, Ltd and all intercompany eliminations

⁽²⁾ Includes all Argo Group parent company eliminations

37

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

(in millions)

	Argo  Group International Holdings,  Ltd (Parent Guarantor)			Argo Group US, Inc. and Subsidiaries (Subsidiary Issuer)			Other Subsidiaries and  Eliminations (1)			Consolidating Adjustments (2)			Total
Net cash flows from operating activities	$	(17.9	)	$	13.7		$	40.4		$	27.3		$	63.5
Cash flows from investing activities:
Proceeds from sales of investments		0.0			458.9			439.6			0.0			898.5
Proceeds from maturities and mandatory calls of investments		0.0			253.9			111.0			0.0			364.9
Purchases of investments		0.0			(712.1	)		(539.3	)		0.0			(1,251.4	)
Change in short-term investments and foreign regulatory deposits		(0.1	)		(64.3	)		(34.6	)		0.0			(99.0	)
Settlements of foreign currency exchange forward contracts		(0.6	)		0.0			0.0			0.0			(0.6	)
Acquisitions		0.0			(1.4	)		0.0			0.0			(1.4	)
Issuance of intercompany note		0.0			(10.0	)		10.0			0.0			0.0
Other, net		0.0			(21.6	)		(2.6	)		0.0			(24.2	)
Cash provided (used) by investing activities		(0.7	)		(96.6	)		(15.9	)		0.0			(113.2	)
Cash flows from financing activities:
Borrowings under intercompany note		27.3			25.0			(25.0	)		(27.3	)		0.0
Proceeds from issuance of senior unsecured fixed rate notes		0.0			139.2			0.0			0.0			139.2
Activity under stock incentive plans		0.7			0.0			0.0			0.0			0.7
Repurchase of Company’s common shares		0.0			(38.6	)		0.0			0.0			(38.6	)
Excess tax expense from share-based payment arrangements		0.0			0.0			0.0			0.0			0.0
Payment of cash dividend to common shareholders		(9.3	)		0.0			0.0			0.0			(9.3	)
Cash used by financing activities		18.7			125.6			(25.0	)		(27.3	)		92.0
Effect of exchange rate changes on cash		0.0			0.0			(0.5	)		0.0			(0.5	)
Change in cash		0.1			42.7			(1.0	)		0.0			41.8
Cash, beginning of period		0.0			85.1			15.8			0.0			100.9
Cash, end of period	$	0.1		$	127.8		$	14.8		$	0.0		$	142.7
(1)      Includes all other subsidiaries of Argo Group International Holdings, Ltd and all intercompany eliminations
(2)      Includes all Argo Group parent company eliminations
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 (in millions)
	Argo Group International Holdings, Ltd (Parent Guarantor)			Argo Group US, Inc. and Subsidiaries (Subsidiary Issuer)			Other Subsidiaries and  Eliminations (1)			Consolidating Adjustments (2)			Total
Net cash flows from operating activities	$	(20.4	)	$	14.7		$	34.8		$	27.1		$	56.2
Cash flows from investing activities:
Proceeds from sales of investments		0.0			705.2			348.0			0.0			1,053.2
Proceeds from maturities and mandatory calls of investments		0.0			190.5			106.2			0.0			296.7
Purchases of investments		0.0			(893.3	)		(433.2	)		0.0			(1,326.5	)
Change in short-term investments and foreign regulatory deposits		(0.1	)		37.8			(29.9	)		0.0			7.8
Settlements of foreign currency exchange forward contracts		2.6			0.0			6.4			0.0			9.0
Issuance of intercompany note		0.0			(3.5	)		3.5			0.0			0.0
Acquisition		0.0			(0.5	)		0.0			0.0			(0.5	)
Other, net		(0.1	)		(7.4	)		(2.1	)		0.0			(9.6	)
Cash provided (used) by investing activities		2.4			28.8			(1.1	)		0.0			30.1
Cash flows from financing activities:
Borrowings under intercompany note		27.1			10.0			(10.0	)		(27.1	)		0.0
Activity under stock incentive plans		0.9			0.0			0.0			0.0			0.9
Repurchase of Company’s common shares		0.0			(35.9	)		0.0			0.0			(35.9	)
Excess tax expense from share-based payment arrangements		0.0			(0.1	)		0.0			0.0			(0.1	)
Payment of cash dividend to common shareholders		(10.0	)		0.0			0.0			0.0			(10.0	)
Cash used by financing activities		18.0			(26.0	)		(10.0	)		(27.1	)		(45.1	)
Effect of exchange rate changes on cash		0.0			0.0			(4.9	)		0.0			(4.9	)
Change in cash		0.0			17.5			18.8			0.0			36.3
Cash, beginning of period		0.0			61.6			21.9			0.0			83.5
Cash, end of period	$	0.0		$	79.1		$	40.7		$	0.0		$	119.8

⁽¹⁾ Includes all other subsidiaries of Argo Group International Holdings, Ltd and all intercompany eliminations

⁽²⁾ Includes all Argo Group parent company eliminations

38

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of our results of operations for the three and nine months ended September 30, 2012 compared with the three and nine months ended September 30, 2011, and also a discussion of our financial condition as of September 30, 2012. This discussion and analysis should be read in conjunction with the attached unaudited interim Consolidated Financial Statements and notes thereto and Argo Group’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission on February 29, 2012, including the audited Consolidated Financial Statements and notes thereto.

Forward Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations, Quantitative and Qualitative Disclosures About Market Risk and the accompanying Consolidated Financial Statements (including the notes thereto) may contain “forward looking statements,” which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that actual developments will be those anticipated by us. Actual results may differ materially as a result of significant risks and uncertainties, including non-receipt of expected payments, the capital markets and their effect on investment income and the fair value of the investment portfolio, development of claims and the effect on loss reserves, accuracy in estimating loss reserves, changes in the demand for our products, the effect of general economic conditions, adverse state and federal legislation and regulations, government investigations into industry practices, developments relating to existing agreements, heightened competition, changes in pricing environments and changes in asset valuations. For a more detailed discussion of risks and uncertainties, see our public filings made with the Securities and Exchange Commission. We undertake no obligation to publicly update any forward-looking statements.

Generally, it is our policy to communicate events that may have a material adverse impact on our operations or financial position, including property and casualty catastrophic events and material losses in the investment portfolio, in a timely manner through a public announcement. It is also our policy not to make public announcements regarding events that are believed to have no material adverse impact on our results of operations or financial position based on management’s current estimates and available information, other than through regularly scheduled calls, press releases or filings.

Results of Operations

The following is a comparison of selected data from our operations:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2012			2011			2012			2011
Gross written premiums	$	485.5		$	448.5		$	1,356.0		$	1,203.0
Earned premiums	$	304.3		$	270.9		$	871.8		$	804.0
Net investment income		28.9			30.0			90.3			96.3
Fee income, net		3.0			1.4			4.8			1.8
Net realized investment gains		8.3			3.9			18.7			37.7
Total revenue	$	344.5		$	306.2		$	985.6		$	939.8
Income (loss) before income taxes	$	17.7		$	(4.0	)	$	70.8		$	(70.0	)
Provision for income taxes		4.3			6.8			13.8			13.3
Net income (loss)	$	13.4		$	(10.8	)	$	57.0		$	(83.3	)
Loss ratio		62.6	%		74.5	%		62.0	%		83.0	%
Expense ratio		39.7	%		38.8	%		40.7	%		39.3	%
Combined ratio		102.3	%		113.3	%		102.7	%		122.3	%

39

The increase in consolidated gross written and earned premiums was primarily attributable to growth in virtually all segments resulting from our introduction of new products, our entrance into new markets, an increase in our participation in Syndicate 1200, increased renewals and rate increases. We continue to focus on writing profitable business and continue to exit products as needed that do not match our profitability targets.

Consolidated net investment income decreased for the three and nine months ended September 30, 2012 as compared to the same periods in 2011 due to a decline in the average interest rates for the periods in 2012 as compared to 2011. Total invested assets at September 30, 2012 and 2011 were $4,194.8 million and $4,009.6 million, respectively, net of $150.1 million and $170.7 million of invested assets attributable to the Syndicate 1200 segment’s trade capital providers. Included in invested assets at September 30, 2012 was $121.1 million received from the senior debt offering that was completed at the end of September 2012.

The increase in consolidated net realized investment gains for the three months ended September 30, 2012 as compared to the same period in 2011 was primarily attributable to increases in the values of certain investments accounted for under the equity method of accounting and currency exchange rate fluctuations impacting the Funds at Lloyds’ investments and our foreign currency hedges. Included in consolidated net realized investment gains were other than temporary impairment write-offs of $1.1 million and $1.2 million for the three months ended September 30, 2012 and 2011, respectively. The decline in net realized investment gains for the nine months ended September 30, 2012 as compared to the same period in 2011 was primarily attributable to $9.6 million in realized gains from the sale of an equity holding during the second quarter of 2011 that had a minimal cost basis, coupled with the recognition of gains of certain fixed maturity and equity securities due to repositioning of the investment portfolio. Included in consolidated net realized investment gains were other than temporary impairment write-offs of $2.0 million and $1.2 million for the nine months ended September 30, 2012 and 2011, respectively.

We have purchased foreign currency 90 day forward contracts to manage currency exposure on losses related to the New Zealand and Japan earthquakes and Australian floods. The terms of these contracts gives us flexibility to adjust the notional amount of the contracts based on payments made and changes in estimates of future losses. We do not apply hedge accounting to these contracts, and as a result, all gains (losses) are recognized in net realized investment gains. For the three months ended September 30, 2012 we recognized $3.9 million in foreign currency exchange losses related to the loss reserves recorded for these events which were partially offset by $2.5 million in realized gains from the currency forward contracts. For the nine months ended September 30, 2012 we recognized $1.8 million in foreign currency exchange losses related to the loss reserves recorded for these events which were more than offset by $2.8 million in realized gains from the currency forward contracts. The difference between the foreign currency exchange loss on the loss reserves and the forward contracts is due to the change in foreign currency rates from the date of loss versus the date the forward contracts were executed. The foreign currency exchange (gains) losses related to these loss reserves and the realized gains (losses) from the currency forward contracts are reported under the Corporate and Other segment.

Consolidated losses and loss adjustment expenses were $186.3 million and $199.6 million for the three months ended September 30, 2012 and 2011, respectively. Included in losses and loss adjustment expenses for the three months ended September 30, 2012 was $13.9 million of losses from storms in the United States, including $11.8 million from Hurricane Isaac. Partially offsetting these losses was $10.4 million in net favorable loss reserve development on prior accident years across virtually all lines. Included in losses and loss adjustment expenses for the three months ended September 30, 2011 was $26.4 million in catastrophe losses primarily resulting from Hurricane Irene and the Danish Cloudburst, aggregate reinsurance covers losses of $9.3 million and an increase in previously estimated losses from the New Zealand earthquake, which occurred in the first quarter of 2011. Partially offsetting these losses was $2.0 million in net favorable loss reserve development on prior accident years. Net favorable development in the workers compensation and commercial automobile lines were partially offset by net unfavorable development in the general liability lines due to the strengthening of loss reserves for run-off asbestos and environmental claims, coupled with net unfavorable development on the international property business.

40

Consolidated losses and loss adjustment expenses were $527.9 million and $664.4 million for the nine months ended September 30, 2012 and 2011, respectively. Included in losses and loss adjustment expenses was $22.0 million in losses from storms in the United States, including $11.8 million from Hurricane Isaac. Partially offsetting these losses was $17.8 million in net favorable loss reserve development on prior accident years. Included in losses and loss adjustment expenses for the nine months ended September 30, 2011 was $170.6 million in catastrophe losses primarily attributable to the New Zealand and Japan earthquakes, windstorms and tornados, including Hurricane Irene, in the United States, Australian floods and the Danish Cloudburst, coupled with $9.3 million in losses under aggregate reinsurance covers. Also included in losses and loss adjustment expenses was $1.6 million in net unfavorable loss reserve development on prior accident years. The following table summarizes the reserve development as respects to prior year loss reserves by line of business for the nine months ended September 30, 2012:

(in millions)	2011 Net Reserves		Net Reserve Development (Favorable)/ Unfavorable			Percent of 2011 Net Reserves
General liability	$	958.1	$	(17.0	)		-1.8	%
Workers compensation		388.6		(7.5	)		-1.9	%
Commercial multi-peril		171.5		15.4			9.0	%
Commercial auto liability		162.1		1.5			0.9	%
Reinsurance - nonproportional assumed property		151.5		(4.3	)		-2.8	%
Special property		11.2		(0.7	)		-6.3	%
Syndicate 1200 property		259.1		(4.6	)		-1.8	%
Syndicate 1200 liability		197.7		2.3			1.2	%
All other lines		36.9		(2.9	)		-7.9	%
Total	$	2,336.7	$	(17.8	)		-0.8	%

In determining appropriate reserve levels for the nine months ended September 30, 2012, 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 losses and loss adjustment expenses and record our best estimate. Consistent with prior reserve valuations, as claims data becomes more mature for prior accident years, actuarial estimates were refined to weigh certain actuarial methods more heavily in order to respond to any emerging trends in the paid and reported loss data. These modifications to the analysis varied depending on whether the line of business was short-tailed or long-tailed and also varied by accident year. 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 infer that more recent accident years’ reserves also will develop favorably; pricing, reinsurance costs, the legal environment, general economic conditions including changes in inflation and many other factors impact our ultimate loss estimates. Since accident year 2007, pricing for our products has been under significant competition and management’s expectation is that profitability for certain lines of business decreased accordingly yet loss costs have not decreased proportionately.

When determining reserve levels, we recognize that there are several factors that present challenges and uncertainties to the estimation of loss reserves. Examples of these uncertainties impacting the estimation of loss reserves include changes in underwriting over the last several years in both the Excess and Surplus Lines and Commercial Specialty segments, changes to the reinsurance structure and potential increases in inflation. Our net retained losses vary by product and they have generally increased over time. To properly recognize these uncertainties, actuarial reviews have given significant consideration to the paid and incurred Bornhuetter-Ferguson (“BF”) methodologies. Compared with other actuarial methodologies, the paid and incurred BF methods assign smaller weight to actual reported loss experience, with the greatest weight assigned to an expected or planned loss ratio. The expected or planned loss ratio has typically been determined using various assumptions pertaining to prospective loss frequency and loss severity. In setting reserves at September 30, 2012, we continued to consider the paid and incurred BF methods for recent years.

41

Our loss reserve estimates gradually blend in the results from development and frequency/severity methodologies over time. For general liability estimates, more credibility is assigned to our own loss experience approximately 60 to 72 months after the beginning of an accident year. For property business, our loss reserve estimates also blend in the results from development and frequency/severity methodologies over time. For property lines, in contrast to general liability estimates, full credibility is assigned to our loss experience approximately 24 to 36 months after the beginning of an accident year, where loss reporting and claims closing patterns settle more quickly. Our loss experience receives partial weighting in the estimates 12 to 24 months after the beginning of the accident year.

On October 29, 2012, Hurricane Sandy made landfall in the Northeastern United States. Preliminary information indicates that this storm has the potential to cause significant insured losses for the industry as a whole. We are currently in the process of analyzing potential claims data and other information to estimate our potential losses from this event. The information available, including any reported claims, is not sufficient to support a reliable loss estimate as of the date of this filing. We may choose to provide an update on our exposure to this event as information becomes available.

Consolidated loss reserves were $3,227.9 million (including $172.7 million of reserves attributable to the Syndicate 1200 segment’s trade capital providers) and $3,349.6 million (including $197.9 million of reserves attributable to the Syndicate 1200 segment’s trade capital providers) as of September 30, 2012 and 2011, respectively. Management has recorded its best estimate of loss reserves as of September 30, 2012 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.

In 2011, we entered into two reinsurance transactions with a special purpose reinsurance company that provided coverage through the issuance of two catastrophe bond transactions. The reinsurance transactions provide coverage for selected events. In accordance with generally accepted accounting principles in the United States (“GAAP”), we are accounting for these covers as derivatives, and as such, present the financial statement impact in a separate line item – “Other reinsurance-related expenses” – in the Consolidated Statements of Income (Loss). Other reinsurance-related expenses totaled $7.0 million and $20.8 million for the three and nine months ended September 30, 2012, compared to $2.7 million and $3.1 million for the same periods in 2011. As management views these coverages as reinsurance protection, we treat the financial statement effects of these covers as ceded premium for the purposes of calculating our loss, expense and combined ratios. The expenses associated with these reinsurance transactions are allocated to the International Specialty, Syndicate 1200 and Corporate and Other segments.

Consolidated underwriting, insurance and acquisition expenses were $118.0 million and $346.3 million for the three and nine months ended September 30, 2012, respectively, compared to $104.2 million and $314.7 million for the same periods in 2011. The increase in these expenses was due to the increase in gross written premiums in 2012 as compared to 2011 and the impacts of the various start-up initiatives in 2012. The increase in the expense ratios in 2012 as compared to 2011 was primarily attributable to expenses related to these start up initiatives in which expenses outpace earned premiums, coupled with new initiatives to reorganize some of our support functions and the development of a corporate-wide information technology platform.

Consolidated interest expense was $5.8 million and $17.0 million for the three and nine months ended September 30, 2012 compared to $5.6 million and $16.5 million for the same periods in 2011. The increase in consolidated interest expense was due to interest accrued on the senior debt offering that was completed at the end of September 2012.

Consolidated foreign currency exchange resulted in a $9.7 million loss for the three months ended September 30, 2012 and a $1.9 million gain for the same period in 2011. The change in the foreign currency exchange (gain) loss was primarily attributable to the weighted average non-US Dollar currencies strengthening against the US Dollar during the third quarter of 2012. For the three months ended September 30, 2011, the US Dollar strengthened against the non US Dollar currencies. Consolidated foreign currency exchange losses were $2.8 million and $11.1 million for the nine months ended September 30, 2012 and 2011, respectively, which was primarily attributable to the non US Dollars currencies strengthening against the US Dollar.

The consolidated provision for income taxes was $4.3 million and $13.8 million for the three and nine months ended September 30, 2012 compared to $6.8 million and $13.3 million for the same periods ended 2011. The consolidated income tax provision represents the income tax expense associated with our operations based on the tax laws of the jurisdictions in which they operate. Therefore, the consolidated provision (benefit) for income taxes represents taxes on net income (loss) for our United States, United Kingdom, Belgium, Brazil, Ireland and Switzerland operations. For the three months ended September 30, 2011, our operations in the United Kingdom and United States generated taxable income which resulted in the tax expense for the consolidated group. For the nine months ended September 30, 2011, the tax provision generated by our operations based in the United States was partially offset by tax benefits for our operations based in the United Kingdom.

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Segment Results

We are primarily engaged in underwriting property and casualty insurance and reinsurance. We have four ongoing reporting segments: Excess and Surplus Lines, Commercial Specialty, International Specialty and Syndicate 1200. Additionally, we have a Run-off Lines segment for products that we no longer underwrite.

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. Management excludes realized investment gains and losses from segment results, as decisions regarding the sales of investments are made at the corporate level. Although this measure of profit (loss) does not replace net income (loss) computed in accordance with GAAP as a measure of profitability, management utilizes this measure of profit (loss) to focus its reporting segments on generating operating income.

Since we generally manage and monitor the investment portfolio and indebtedness on an aggregate basis, the overall performance of the investment portfolio, including the related net investment income and interest expense, are discussed above on a consolidated basis under consolidated net investment income and consolidated interest expense rather than within or by segment. We allocate net investment income and interest expense to each segment based on their allocated capital and reserves, while taking into consideration the anticipated duration of these reserves.

Excess and Surplus Lines. The following table summarizes the results of operations for the Excess and Surplus Lines segment for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2012			2011			2012			2011
Gross written premiums	$	131.7		$	117.0		$	382.9		$	357.3
Earned premiums	$	100.8		$	99.5		$	295.5		$	305.8
Losses and loss adjustment expenses		60.0			54.6			164.8			194.6
Underwriting, acquisition and insurance expenses		35.9			35.1			106.3			106.2
Underwriting income		4.9			9.8			24.4			5.0
Net investment income		12.5			13.4			38.5			42.8
Interest expense		(2.3	)		(2.1	)		(6.6	)		(6.2	)
Income before income taxes	$	15.1		$	21.1		$	56.3		$	41.6
Loss ratio		59.5	%		55.0	%		55.7	%		63.7	%
Expense ratio		35.5	%		35.3	%		36.0	%		34.7	%
Combined ratio		95.0	%		90.3	%		91.7	%		98.4	%

The increase in gross written premiums for the three and nine months ended September 30, 2012 as compared to the same periods in 2011 was primarily attributable to increases in the property, casualty and environmental product lines. The Excess and Surplus Lines segment has introduced several new products during 2012 to drive future growth and profitability. This growth was partially offset by decreases in errors & omissions businesses as we continue to exit unprofitable lines of business and drive rate increases in targeted classes. The increase in earned premiums for the three months ended September 30, 2012 as compared to the same period in 2011 was the result of the increased gross written premiums. The decline in earned premiums for the nine months ended September 30, 2012 as compared to the same period in 2011 was the result of reduced gross written premiums in the second half of 2011 and the first quarter of 2012 as we were implementing the strategies noted above.

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Included in the loss ratio for the three months ended September 30, 2012 was $8.2 million in losses from Hurricane Isaac. Offsetting these losses was $11.8 million in net favorable loss reserve development on prior accident years. The favorable development was primarily attributable to $9.8 million in favorable development in the general and product liability lines for accident years 2005, 2008 and 2009. Included in the loss ratio for the three months ended September 30, 2011, was $2.2 million of catastrophe losses resulting from storm activity in the United States, including $1.5 million from Hurricane Irene. Offsetting these catastrophe losses was $15.6 million of net favorable loss reserve development on prior accident years. This favorable development was driven by $12.3 million of favorable development in our general and products liability lines, primarily in accident years 2005 through 2008, resulting from better than expected claim severity. The remaining favorable development is primarily due to our automobile liability and property lines of business.

Included in the loss ratio for the nine months ended September 30, 2012 was $10.0 million resulting from storms in the United States, including $8.2 million from Hurricane Isaac. Offsetting these losses was $33.5 million in net favorable loss reserve development on prior accident years. This favorable development was driven by $23.6 million of favorable development in the general and products liability lines in accident years 2009 and prior, $3.1 million in favorable development in property lines, primarily in accident year 2010, and favorable development of $2.4 million in auto liability, primarily driven by accident year 2009. Included in the loss ratio for the nine months ended September 30, 2011, was $7.7 million of catastrophe losses resulting from storm activity in the United States. Offsetting these catastrophe losses was $17.8 million of net favorable loss reserve development on prior accident years, driven by $13.2 million of favorable development in our general and products liability lines and $3.4 million of favorable development in our automobile liability. The remaining favorable development was primarily attributable to the professional liability and property lines of business. Loss reserves were $1,236.1 million and $1,310.4 million at September 30, 2012 and 2011, respectively.

The increases in the expense ratios for the three and nine months ended September 30, 2012 as compared to the same periods in 2011 were primarily attributable to increased compensation expenses coupled with expenses associated with new initiatives to reorganize some of our support functions.

Commercial Specialty. The following table summarizes the results of operations for the Commercial Specialty segment for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2012			2011			2012			2011
Gross written premiums	$	144.8		$	151.9		$	345.2		$	335.1
Earned premiums	$	78.6		$	82.9		$	241.8		$	233.7
Losses and loss adjustment expenses		62.3			64.4			188.7			178.6
Underwriting, acquisition and insurance expenses		26.7			25.9			83.7			80.1
Underwriting loss		(10.4	)		(7.4	)		(30.6	)		(25.0	)
Net investment income		6.7			6.6			20.6			21.0
Interest expense		(1.4	)		(1.3	)		(4.2	)		(3.7	)
Fee income, net		2.4			0.9			2.4			0.4
Loss before income taxes	$	(2.7	)	$	(1.2	)	$	(11.8	)	$	(7.3	)
Loss ratio		79.1	%		77.6	%		78.0	%		76.4	%
Expense ratio		34.0	%		31.3	%		34.6	%		34.3	%
Combined ratio		113.1	%		108.9	%		112.6	%		110.7	%

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The decline in gross written and earned premiums for the three months ended September 30, 2012 as compared to the same period in 2011 was primarily attributable to our focus on underwriting profitable accounts and achieving rate increases. Gross written premiums for our US retail operations declined $4.2 million due to underwriting initiatives to increase rate, the elimination of underperforming grocery accounts and a lower than expected renewal retention on large restaurant accounts in the quarter. Gross written premiums for our commercial programs declined $3.7 million due to the termination of a logging program. Gross written premiums for our workers compensation products declined $1.7 million primarily due to decreased payrolls on large deductible policies. Partially offsetting the decreases was a $2.3 million increase in our surety programs as we focus on growing this business and a $1.6 million increase for our Alteris unit primarily attributable to the introduction of new programs. The increase in gross written and earned premiums for the nine months ended September 30, 2012 as compared to the same period in 2011 primarily reflect an increase in our surety and workers compensation products, partially offset by targeted reductions in our grocery business premium as certain accounts did not meet our underwriting standards.

Included in the loss ratio for the three months ended September 30, 2012 was $3.7 million in losses resulting from storms in the United States, including $0.1 million related to Hurricane Isaac. Included in losses and loss adjustment expenses was $0.6 million of net unfavorable development on prior accident year loss reserves. The unfavorable development was primarily attributable to $2.2 million unfavorable development in general liability lines due to increased claims severity and $0.9 million unfavorable development in the automobile liability lines. Partially offsetting the unfavorable development was $1.7 million of favorable development in the workers compensation lines and $0.9 million favorable development in the short tail lines. Included in the loss ratio for the three months ended September 30, 2011, was $7.9 million of catastrophe losses resulting from storm activity in the United States, including $6.0 million from Hurricane Irene. Included in losses and loss adjustment expenses for the three months ended September 30, 2011 was $3.9 million of net unfavorable loss reserve development on prior accident years resulting from $4.8 million of unfavorable development in general liability due primarily to increases in claim severity, partially offset by favorable development in workers compensation, auto liability and property lines.

Included in the loss ratio for the nine months ended September 30, 2012 was $7.9 million in losses resulting from storms in the United States, including $0.1 million related to Hurricane Isaac. Included in losses and loss adjustment expenses was $18.6 million of net unfavorable development on prior accident year loss reserves. The unfavorable development was primarily attributable to $24.9 million of unfavorable development in the general liability lines due to increases in claim severity, and $3.8 million unfavorable development in the automobile liability lines. Partially offsetting the unfavorable development was $7.7 million of favorable development in the workers compensation lines and $2.4 million favorable development in the short tail lines. Included in the loss ratio for the nine months ended September 30, 2011, was $19.1 million of catastrophe losses resulting from storm activity in the United States, including $6.0 million from Hurricane Irene and $6.3 million from the Alabama and Joplin tornados. Additionally, for the nine months ended September 30, 2011, we recognized $4.7 million of unfavorable loss development on prior accident years. The unfavorable development was primarily attributable to $12.1 million of unfavorable development in general liability and auto liability lines primarily attributable to increases in claim severity, partially offset by $4.1 million of favorable development in workers compensation and $3.7 million of favorable development in an assumed Directors and Officers program. Loss reserves for the Commercial Specialty segment were $630.6 million and $622.4 million as of September 30, 2012 and 2011, respectively.

The increases in the expense ratios for the three and nine months ended September 30, 2012 as compared to the same periods in 2011 were primarily attributable to increased expenses associated with new initiatives to reorganize some of our support functions coupled with increased outside service fees.

Net fee income consists of commissions earned by our managing general underwriters for brokerage business placed outside Argo Group minus the expenses associated with generating the commissions. The increases in net fee income for the three and nine months ended September 30, 2012 as compared to the same periods in 2011 was primarily attributable to an increased focus on profitable fees based business.

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International Specialty: The following table summarizes the results of operations for the International Specialty segment for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2012			2011			2012			2011
Gross written premiums	$	60.2		$	44.4		$	202.1	��	$	174.5
Earned premiums	$	33.4		$	21.3		$	90.8		$	76.0
Losses and loss adjustment expenses		14.9			28.8			37.8			124.6
Other reinsurance-related expenses		2.3			—			7.0			—
Underwriting, acquisition and insurance expenses		11.6			7.2			30.9			21.1
Underwriting income (loss)		4.6			(14.7	)		15.1			(69.7	)
Net investment income		3.1			2.4			10.0			8.1
Interest expense		(1.1	)		(0.8	)		(3.1	)		(2.3	)
Income (loss) before income taxes	$	6.6		$	(13.1	)	$	22.0		$	(63.9	)
Loss ratio		48.0	%		135.0	%		45.2	%		163.9	%
Expense ratio		37.4	%		34.1	%		36.9	%		27.9	%
Combined ratio		85.4	%		169.1	%		82.1	%		191.8	%

The increase in gross written and earned premiums for the three and nine months ended September 30, 2012 as compared to the same periods in 2011 was primarily attributable to our new business units in Brazil, Dubai and the European Union. Earned premiums for the property catastrophe reinsurance unit increased to $20.0 million for the three months ended September 30, 2012 compared to $17.1 million for the same period in 2011. The excess casualty and professional lines unit contributed earned premiums of $4.6 million for the three months ended September 30, 2012 compared to $4.1 million for the same period in 2011. Our Brazilian business unit commenced writing business during 2012 and contributed $6.7 million of earned premium for the three months ended September 30, 2012.

Earned premiums for the property catastrophe reinsurance unit decreased to $55.3 million for the nine months ended September 30, 2012 compared to $63.9 million for the same period in 2011. The excess casualty and professional lines unit contributed earned premiums of $13.1 million for the nine months ended September 30, 2012 compared to $12.1 million for the same period in 2011. Our Brazilian business unit commenced writing business during 2012 and contributed $18.4 million of earned premium for the nine months ended September 30, 2012.

Included in the loss ratio for the three months ended September 30, 2012 were $0.5 million in losses resulting from Hurricane Isaac and a $1.1 million reduction in loss resulting from storms that occurred in the first six months of 2012 in the United States. Included in losses and loss adjustment expenses was $0.9 million of net favorable development on prior accident year loss reserves in short tail lines. Included in losses and loss adjustment expenses for the three months ended September 30, 2011 were $13.6 million of catastrophe losses primarily attributable to Hurricane Irene, the Danish Cloudburst and unfavorable development of loss reserves associated with the Japan earthquake and tsunami and the Christchurch earthquake which occurred during the first quarter of 2011 and aggregate reinsurance covers losses of $9.3 million. Also included in losses and loss adjustment expenses for the three months ended September 30, 2011 was $0.2 million in unfavorable loss reserve development on prior accident years, primarily attributable to non-catastrophe losses.

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Included in the loss ratio for the nine months ended September 30, 2012 was $1.0 million in losses resulting from storms in the United States including $0.5 million from Hurricane Isaac. Offsetting these losses was $4.5 million in favorable loss reserve development on prior accident years primarily due to the non-catastrophe property reinsurance losses. Included in losses and loss adjustment expenses for the nine months ended September 30, 2011 were $98.3 million of catastrophe losses related to the Japan earthquake and tsunami, the Christchurch earthquake, the Brisbane, Australia floods, the Alabama and Joplin tornados, Hurricane Irene and the Danish Cloudburst and aggregate reinsurance covers losses of $9.3 million. Partially offsetting these losses was $3.6 million in favorable loss reserve development on prior accident years, primarily attributable to non-catastrophe losses. Loss reserves were $251.1 million and $250.2 million at September 30, 2012 and 2011, respectively.

The increase in the expense ratio for the three and nine months ended September 30, 2012 as compared to 2011 was due to costs associated with the segment’s new business unit in Brazil. Expenses associated with this unit, as is typical for start up operations, are disproportionately higher than earned premiums.

Syndicate 1200: The following table summarizes the results of operations for the Syndicate 1200 segment for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2012			2011			2012			2011
Gross written premiums	$	148.2		$	135.2		$	424.5		$	335.7
Earned premiums	$	90.8		$	67.3		$	242.3		$	188.2
Losses and loss adjustment expenses		45.3			45.5			130.6			163.1
Other reinsurance-related expenses		1.9			—			5.6			—
Underwriting, acquisition and insurance expenses		35.3			30.5			99.3			86.4
Underwriting income (loss)		8.3			(8.7	)		6.8			(61.3	)
Net investment income		3.8			4.3			11.4			13.3
Interest expense		(0.9	)		(0.8	)		(2.6	)		(2.4	)
Fee income, net		0.6			0.5			2.4			1.4
Income (loss) before income taxes	$	11.8		$	(4.7	)	$	18.0		$	(49.0	)
Loss ratio		51.0	%		67.6	%		55.2	%		86.7	%
Expense ratio		39.7	%		45.3	%		41.9	%		45.8	%
Combined ratio		90.7	%		112.9	%		97.1	%		132.5	%

Earned premiums represent premiums earned on the portion of gross written premiums retained by Argo Group. In 2012 we increased our participation in Syndicate 1200 from 67% to 79%. For the three and nine months ended September 30, 2012, the property division recorded gross written premiums of $67.6 million and $202.1 million, respectively, compared to $69.1 million and $192.6 million for the same periods in 2011. The increase in the gross written property premiums for the nine months ended September 30, 2012 was driven by the effects of optimizing the property portfolio and the effect of the new underwriting teams gaining traction in 2012. The property book has seen year to date rate increases of approximately 5%. These increases are partially offset by significant competition in the direct and facultative market and planned reductions to international business in both the direct and facultative and international treaty books as a result of our plan to reduce international exposures in this segment.

For the three and nine months ended September 30, 2012, the casualty division recorded gross written premiums of $47.4 million and $132.8 million, respectively, compared to $40.8 million and $90.0 million for the same periods in 2011. The increase in casualty written premiums in 2012 was driven by the addition of a new class of business in 2012 and existing classes growing as new underwriters gain traction.

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For the three and nine months ended September 30, 2012, the specialty division recorded gross written premiums of $27.3 million and $72.0 million, respectively, compared to $20.3 million and $45.7 million for the same periods in 2011. The aerospace division recorded gross written premiums of $5.8 million and $17.5 million, respectively, for the three and nine months ended September 30, 2012 compared to $4.9 million and $7.3 million for the same periods in 2011. The increases in the specialty and aerospace divisions were due to the divisions now being in place for a full year, as these divisions began writing business in the first quarter of 2011.

The increase in earned premiums in 2012 as compared to 2011 is primarily attributable to the increase in gross written premiums discussed above.

Losses and loss adjustment expenses are reported net of losses ceded to the trade reinsurers. Losses and loss adjustment expenses for the three months ended September 30, 2012 included $3.0 million in losses resulting from Hurricane Isaac. Additionally, included in losses and loss adjustment expenses was $2.1 million in net favorable loss reserve development on prior accident years primarily attributable to $4.5 million favorable development in the property lines, primarily attributable to the property facultative business, and in the special marine lines primarily attributable to the offshore programs. Partially offsetting this favorable development was $2.4 million unfavorable development for programs we no longer underwrite. Included in losses and loss adjustment expenses for the three months ended September 30, 2011 was $2.7 million in catastrophe losses resulting from storms in the United States, including Hurricane Irene. Included in losses and loss adjustment expenses for the three months ended September 30, 2011 was $3.2 million of net unfavorable loss reserve development on prior accident years, primarily due to $3.3 million of unfavorable development in the property lines and $0.8 million of unfavorable development in the liability lines. Partially offsetting this unfavorable loss reserve development was $0.9 million of favorable development in a number of classes due to better than expected claims experience.

Losses and loss adjustment expenses for the nine months ended September 30, 2012 included $3.0 million in losses resulting from Hurricane Isaac. Additionally, included in losses and loss adjustment expenses was $4.4 million in net favorable reserve development primarily attributable to $8.9 million of favorable development in the property lines, special marine lines and aerospace lines. Partially offsetting this favorable development was $2.3 million of unfavorable development in the general liability lines coupled with $2.1 million of unfavorable development in lines we no longer underwrite. Included in losses and loss adjustment expenses for the nine months ended September 30, 2011 was $45.5 million in catastrophe losses from the storms in the United States, the New Zealand and Japan earthquakes and the Australian floods. Additionally, included in losses and loss adjustment expenses for the nine months ended September 30, 2011 was $14.8 million of unfavorable loss reserve development on prior accident years. The unfavorable development was primarily attributable to $10.1 million of unfavorable development in the liability lines of business driven by deterioration in the professional indemnity and general liability classes of business related to a small number of specific claims and a reduction in the estimate of future reinsurance recoveries. Additionally, we recognized $4.6 million of unfavorable development related to property lines of business where the claims experience was worse than expected.

Loss reserves as of September 30, 2012 were $737.7 million which includes $172.7 million attributable to trade providers, compared to $750.3 million which includes $197.9 million of reserves attributable to the trade capital providers as of September 30, 2011.

The decrease in the expense ratio in the three and nine months ended September 30, 2012 as compared to the same periods in 2011 was driven by an increase in net earned premium. Business written through Lloyd’s typically incurs higher acquisition expenses compared to other insurance markets due to the distribution model.

Fee income, net represents fees and profit commission derived from the management of third party capital for our underwriting syndicate at Lloyd’s. The increase in fee income, net for the three and nine months ended September 30, 2012 as compared to the same period in 2011 was primarily due to a reduction in associated expenses in 2012.

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Run-off Lines.The Company has discontinued underwriting certain lines of business, including those lines that were previously reported in Argo Group US, Inc.’s Risk Management segment and PXRE Reinsurance Limited (“PXRE”). As the Company no longer actively underwrites business within these programs, all current activity is related to the management of claims and other administrative functions.

Also included in the Run-off Lines segment are liabilities associated with other liability policies written in the 1970s and into the 1980s, and include asbestos and environmental liabilities as well as medical malpractice liabilities. The Company regularly monitors the activity of claims within the Run-off Lines.

The following table summarizes the results of operations for the Run-off Lines segment:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2012			2011			2012			2011
Earned premiums	$	0.7		$	(0.1	)	$	1.4		$	0.3
Losses and loss adjustment expenses		3.8			6.3			6.0			3.5
Underwriting, acquisition and insurance		1.7			2.0			4.8			7.9
Underwriting loss		(4.8	)		(8.4	)		(9.4	)		(11.1	)
Net investment income		2.8			3.1			9.8			10.4
Interest expense		(0.5	)		(0.5	)		(1.9	)		(1.3	)
Loss before income taxes	$	(2.5	)	$	(5.8	)	$	(1.5	)	$	(2.0	)

Earned premiums for the three and nine months ended September 30, 2012 and 2011 were attributable to adjustments resulting from final audits, return premium adjustments on retrospectively rated policies and other adjustments on policies previously written.

Losses and loss adjustment expenses for the three months ended September 30, 2012 included $3.8 million of net unfavorable loss reserve development on prior accident years primarily due to $5.5 million of unfavorable development in asbestos, primarily resulting from increased defense costs, and $1.7 million of unfavorable development for other latent lines. Partially offsetting the unfavorable development was $3.4 million in net favorable development primarily attributable to the run-off workers compensation lines. Losses and loss adjustment expenses for the three months ended September 30, 2011 included $6.3 million of net unfavorable loss reserve development on prior accident years primarily due to $9.7 million of unfavorable development in asbestos and environmental, partially offset by favorable development in other lines.

Losses and loss adjustment expenses for the nine months ended September 30, 2012 included $6.0 million of net unfavorable loss reserve development on prior accident years primarily attributable to the asbestos lines as noted above, partially offset by favorable development within the run-off workers compensation lines. Losses and loss adjustment expenses for the nine months ended September 30, 2011 included $3.5 million of net unfavorable loss reserve development on prior accident years. This unfavorable development is primarily due to $11.7 million of unfavorable development in asbestos and environmental, partially offset by the collection of a contribution settlement from another insurer for a California workers compensation indemnity claim, and favorable development in other lines. The asbestos and environmental unfavorable development is primarily attributable to $8.2 million for asbestos losses driven by increasing severities, defense costs and the settlement of a disputed reinsurance recoverable matter, and $3.5 million for environmental losses driven by one significant environmental claim.

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Loss reserves for the Run-off Lines were as follows:

	Nine Months Ended September 30,
(in millions)	2012						2011
	Gross			Net			Gross			Net
Asbestos and environmental:
Loss reserves, beginning of the year	$	75.3		$	68.2		$	90.2		$	82.7
Incurred losses		5.8			5.5			14.0			11.7
Losses paid		(12.3	)		(11.1	)		(21.1	)		(19.6	)
Loss reserves - asbestos and environmental, end of the period		68.8			62.6			83.1			74.8
Risk management reserves		280.1			197.8			303.6			212.8
PXRE run-off reserves		15.3			15.3			21.8			21.8
Other run-off lines		8.2			7.4			7.8			7.3
Total loss reserves - Run-off Lines	$	372.4		$	283.1		$	416.3		$	316.7

Management regularly monitors and evaluates the activity of our asbestos and environmental liability exposures and adjustments to the reserves may be recorded during any reporting period.

Underwriting, acquisition and insurance expenses for the Run-off Lines segment consists primarily of administrative expenses. Included in underwriting expense for the nine months ended September 30, 2011 was $4.0 million due to the write off of certain reinsurance balances that were deemed uncollectible. Partially offsetting this expense was a $0.9 million recovery of a reinsurance recoverable balance that was previously written off.

Liquidity and Capital Resources

Our principal operating cash flow sources are premiums and investment income. The primary operating cash uses are claim payments, reinsurance costs, acquisition and operating expenses. Argo Group’s holding companies have access to various sources of liquidity including subsidiary dividends, its revolving credit facility and access to the debt and equity capital markets.

For the nine months ended September 30, 2012, net cash provided by operating activities was $63.5 million compared to $56.2 million of net cash provided by operating activities for the same period in 2011. The increase in cash provided was primarily attributable to increased collections on our reinsurance recoverables on paid losses and a decrease in claim payments. Offsetting this were increased payments in 2012 related to our two catastrophe bond reinsurance contracts (see Note 10, “Derivative Instruments”) and present during the nine months ended September 30, 2011 was the receipt of $16.8 million from the settlement of an outstanding reinsurance recoverable balance.

From January 1, 2012 through September 30, 2012, we repurchased 1,276,904 shares of our common stock at an average price of $29.38 for a total cost of $37.6 million. Since 2008, when we first began buying back our common shares, through September 30, 2012, we have repurchased 6,248,209 shares of our common stock at an average price of $31.76 for a total cost of $198.5 million.

On April 30, 2010, each of Argo Group International Holdings, Ltd., Argo Group US, Inc. (“Argo Group US”), Argo International Holdings Limited, and Argo Underwriting Agency Limited (the “Borrowers”) entered into a $150,000,000 Credit Agreement (“Credit Agreement”) with major money center banks. On July 22, 2011, the Borrowers entered into Amendment No. 2 to the Credit Agreement which increased the revolving credit facility under the Credit Agreement from $150 million to $170 million, extended the maturity date from April 30, 2013 to April 30, 2014, and modified certain other terms. 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.

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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. Lenders holding more than 51% of the loans and commitments under the Credit Agreement may elect to accelerate the maturity of the loans 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.

Currently, we do not have an outstanding balance under the $170.0 million credit facility. The credit facility allows up to $15.0 million of the facility to be used for letters of credit, subject to availability under the line. Currently, we have $0.8 million in letters of credit outstanding under the facility.

On September 25, 2012, through our wholly owned subsidiary Argo Group US, we issued $125,000,000 aggregate principal amount of Argo Group US’s 6.5% Senior Notes due September 15, 2042 (the “Notes”). Subsequently on September 25, 2012, the underwriters of the offering exercised their option to purchase an additional $18,750,000 aggregate principal amount of Notes, which were issued on September 26, 2012. The Notes bear interest at 6.5%, payable quarterly in cash in arrears on the 15th day of March, June, September and December of each year, beginning on December 15, 2012. The Notes are unsecured and unsubordinated obligations of Argo Group US and rank equally in right of payment with all of Argo Group US’s other unsecured and unsubordinated debt. The Notes are guaranteed on a full and unconditional senior unsecured basis by Argo Group. The Notes may be redeemed, for cash, in whole or in part, on or after September 15, 2017, at Argo Group US’s option, at any time and from time to time, until maturity at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued but unpaid interest on the principal amount being redeemed to, but not including, the redemption date.

The net proceeds from the offering were approximately $138.6 million, after deducting the underwriting discount and other estimated expenses of the offering to be paid by Argo Group. At September 30, 2012, $121.1 million of the proceeds were invested in short-term instruments.

On October 1, 2012, we announced that we gave notice of redemption to the trustee of our 8.85% PXRE Capital Trust I $103,093,000 Junior Subordinated Debt Securities (the “Debt Securities”). The Debt Securities will be redeemed on November 12, 2012 at a redemption price equal to 102.090% of its principal amount, plus accrued and unpaid interest to the redemption date. Additionally, on October 8, 2012, we announced that we gave notice of redemption to the trustee of our 9.75% PXRE Capital Trust III $15,464,000 Junior Subordinated Debt Securities. The Debt Securities will be redeemed on November 23, 2012 at a redemption price equal to 100.975% of its principal amount, plus accrued and unpaid interest to the redemption date. Interest on the Debt Securities will cease to accrue on and after the redemption dates.

On August 7, 2012, our Board of Directors declared a quarterly cash dividend in the amount of $0.12 on each share of common stock outstanding. On September 18, 2012, we paid $3.0 million to our shareholders of record on September 4, 2012. For the nine months ended September 30, 2012, we have paid cash dividends totaling $9.3 million to our shareholders.

In September 2012, Argo Group US received an ordinary dividend in the amount of $10.0 million in cash from Rockwood Casualty Insurance Company, which is a primary direct subsidiary of Argo Group US. In September 2012, Argo Group US received an ordinary dividend of $50.9 million, in the form of securities, from Colony Insurance Company.

Refer to Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in Argo Group’s Annual Report on Form 10-K for the year ended December 31, 2011 that Argo Group filed with the Securities and Exchange Commission on February 29, 2012 for further discussion on Argo Group’s liquidity.

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Recent Accounting Standards and Critical Accounting Estimates

New Accounting Standards

The discussion of the adoption and pending adoption of recently issued accounting policies is included in Note 2, “Recently Issued Accounting Standards,” in the Notes to the Consolidated Financial Statements, included in Part I, Item 1—“Consolidated Financial Statements (unaudited).”

Critical Accounting Estimates

Refer to “Critical Accounting Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 that we filed with the Securities and Exchange Commission on February 29, 2012 for information on accounting policies that we consider critical in preparing our consolidated financial statements. These policies include significant estimates made by management using information available at the time the estimates were made. However, these estimates could change materially if different information or assumptions were used.

Income Taxes

We are incorporated under the laws of Bermuda and, under current Bermuda law, are not obligated to pay any taxes in Bermuda based upon income or capital gains. We have received an undertaking from the Supervisor of Insurance in Bermuda pursuant to the provisions of the Exempted Undertakings Tax Protection Act, 2011, which exempts us from any Bermuda taxes computed on profits, income or any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, at least until the year 2035.

We do not consider ourselves to be engaged in a trade or business in the United States or the United Kingdom and, accordingly, do not expect to be subject to direct United States or United Kingdom income taxation.

We have subsidiaries based in the United Kingdom that are subject to the tax laws of that country. Under current law, these subsidiaries are taxed at the applicable corporate tax rates. Six of the United Kingdom subsidiaries are deemed to be engaged in business in the United States and are therefore subject to United States corporate tax in respect of a proportion of their United States underwriting business only. Relief is available against the United Kingdom tax liabilities in respect of overseas taxes paid that arise from the underwriting business. Corporate income tax losses incurred in the United Kingdom can be carried forward, for application against future income, indefinitely. Our United Kingdom subsidiaries file separate United Kingdom income tax returns.

We have subsidiaries based in the United States that are subject to the tax laws of that country. Under current law, these subsidiaries are taxed at the applicable corporate tax rates. Our United States subsidiaries file a consolidated United States federal income tax return.

We also have operations in Belgium, Switzerland, Brazil, France, Malta, Spain and Ireland, which are subject to income taxes imposed by the jurisdiction in which they operate. We have operations in the United Arab Emirates, which are not subject to income tax under the laws of that country.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We believe that we are principally exposed to three types of market risk: interest rate risk, credit risk and foreign currency risk.

Interest Rate Risk

Our fixed maturities portfolio is exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the fair valuation of these securities. As interest rates rise, the fair value of our fixed maturity portfolio generally falls, and the converse is generally also true. We manage interest rate risk through an asset liability strategy that involves

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the selection of investments with appropriate characteristics, such as duration, yield, currency and liquidity that are tailored to the anticipated cash outflow characteristics of our liabilities. A significant portion of the investment portfolio matures each quarter, allowing for reinvestment at current market rates.

Credit Risk

We have exposure to credit risk primarily as a holder of fixed maturity investments, short-term investments, and other investments. Our risk management strategy and investment policy is to primarily invest in debt instruments of high credit quality issuers and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer.

As shown on the accompanying table, our fixed maturities portfolio is diversified among different types of investments. The securities are rated by one or more Nationally Recognized Statistical Rating Organizations, i.e., Standard & Poor’s, Moody’s Investors Services, Inc., and Fitch Ratings, Ltd. If a security has two ratings, the lower rating is used. If a security has three ratings, the middle rating is used in the preparation of this table. At September 30, 2012, our fixed maturities portfolio had a weighted average rating of AA-, with 80.0% ($2.5 billion fair value) rated A or better, and 46.8% ($1.5 billion fair value) rated AAA. Our portfolio included 6.9% ($219.4 million fair value) of less than investment grade (BB+ or lower) fixed maturities at September 30, 2012. We do not own any fixed maturity sovereign securities issued by Portugal, Ireland, Italy, Greece, or Spain.

(in millions)	Fair Value AAA		Fair Value AA		Fair Value A		Fair Value Other		Total
USD denominated:
U.S. Governments	$	408.6	$	6.1	$	0.7	$	1.5	$	416.9
Non-U.S. Governments		8.2		4.6		5.7		41.5		60.0
Obligations of states and political subdivisions		151.3		382.4		65.5		10.6		609.8
Credit-Financial		8.2		46.7		232.0		103.4		390.3
Credit-Industrial		5.7		10.7		128.2		297.7		442.3
Credit-Utility		—		15.3		39.1		140.3		194.7
Structured securities:
CMO/MBS-agency		444.5		—		—		—		444.5
CMO/MBS-non agency		3.3		2.5		0.3		8.1		14.2
CMBS		96.8		10.4		—		3.8		111.0
ABS-residential		1.3		0.3		—		8.8		10.4
ABS-non residential		74.3		0.9		0.2		2.9		78.3
Foreign denominated:
Governments		243.3		5.7		3.2		3.3		255.5
Credit		32.6		30.4		57.7		8.9		129.6
Total fixed maturities	$	1,478.1	$	516.0	$	532.6	$	630.8	$	3,157.5

We also hold a diversified investment portfolio of common stocks in various industries and market segments, ranging from small market capitalization stocks to large capitalization companies. Marketable equity securities are carried on the consolidated balance sheets at fair value, and are subject to the risk of potential loss in fair value resulting from adverse changes in prices. At September 30, 2012, the fair value of the equity securities portfolio was $533.3 million.

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Foreign Currency Risk

We have exposure to foreign currency risk in both our insurance contracts and our invested assets. Some of our insurance contracts provide that ultimate losses may be payable in foreign currencies. Foreign currency exchange rate risk exists where we do not have cash or securities denominated in the currency for which we will ultimately pay the claims. Thus, we attempt to manage our foreign currency risk by seeking to match our liabilities under insurance and reinsurance polices that are payable in foreign currencies with cash and investments that are denominated in such currencies. In certain instances, we use foreign exchange forward and put option contracts to mitigate this risk. Due to the extended time frame for settling the claims plus the fluctuation in currency exchange rates, the potential exists for us to realize gains and or losses related to foreign exchange rates. In addition, we may experience foreign currency gains or losses related to exchange rate fluctuations in operating expenses as certain operating costs are payable in currencies other than the U.S. Dollar. For the three and nine months ended September 30, 2012, we recorded realized losses of $9.7 million and $2.8 million from movements in foreign currency rates on our insurance operations, realized losses of $0.3 million and $1.0 million from movements on foreign currency rates in our investment portfolio, and realized gains of $2.0 million and $2.3 million from the currency forward and put option contracts, respectively. In addition, we had unrealized losses at September 30, 2012 of $1.1 million in movements on foreign currency rates in our investment portfolio, which is recorded in other comprehensive income.

We enter into short-term, currency spot and forward contracts designed to mitigate foreign exchange rate exposure for certain non-U.S. Dollar denominated fixed maturity investments. The forward contracts used are typically less than sixty days and may be renewed, as long as the non-U.S. Dollar denominated higher yielding fixed maturities investments are held in the portfolio. Forward contracts are designated as hedges for accounting purposes. The net realized effect on income for the three and nine months ended September 30, 2012 was not material.

Item 4. Controls and Procedures

Argo Group, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2012. In designing and evaluating these disclosure controls and procedures, Argo Group and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by Argo Group in the reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no changes in the internal control over financial reporting made during the quarter ended September 30, 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We review our disclosure controls and procedures, which may include internal controls over financial reporting, on an ongoing basis. From time to time, management makes changes to enhance the effectiveness of these controls and ensure that they continue to meet the needs of our business activities over time.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Argo Group’s subsidiaries are parties to legal actions incidental to their business. Based on the opinion of counsel, management believes that the resolution of these matters will not materially affect our financial condition or results of operations.

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Item 1a. Risk Factors

See “Risk Factors” in the Argo Group Annual Report on Form 10-K for the year ended December 31, 2011 for a detailed discussion of the risk factors affecting the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchase of Equity Securities

On February 18, 2011, our Board of Directors authorized the repurchase of up to $150.0 million of our common shares (“2011 Repurchase Authorization”). The 2011 Repurchase Authorization supersedes the repurchase authorization approved on November 13, 2007 by the Board of Directors. Excluding the shares surrendered by employees in payment for the minimum required withholding taxes due to the vesting of restricted stock units, during the three months ended September 30, 2012, we repurchased 335,982 shares at a cost of $10.2 million.

As of September 30, 2012, we had repurchased a total of 6,248,209 of our common shares (total of $198.5 million repurchased) since the inception of the buy-back program in 2007. Shares of stock repurchased will be held as treasury shares in accordance with the provisions of the Bermuda Companies Act 1981.

The following table provides information with respect to shares of our common stock that were repurchased or surrendered during the three months ended September 30, 2012:

Period	Total Number of Shares Purchased (a)		Average Price Paid per Share (b)		Total Number of Shares Purchased as Part of Publicly Announced Plan or Program (c)		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan or Program (d)
July 1 through July 31, 2012		154,255	$	30.19		154,255	$	83,508,958
August 1 through August 31, 2012		146,919	$	30.38		146,727	$	79,051,848
September 1 through September 30, 2012		35,000	$	30.85		35,000	$	77,972,126
Total		336,174	$	30.34		335,982

Employees are allowed to surrender shares to settle the tax liability incurred upon the vesting of shares under the various employee equity compensation plans. For the three months ended September 30, 2012, we received 192 shares of our common stock that were surrendered by employees in payment for the minimum required withholding taxes due to the vesting of non-vested shares. In the above table, these shares are included in columns (a) and (b), but excluded from columns (c) and (d). These shares do not reduce the number of shares that may yet be purchased under the repurchase plan.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

A list of exhibits required to be filed as part of this report is set forth in the Exhibit Index of this Form 10-Q, which immediately precedes such exhibits, and is incorporated herein by reference.

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EXHIBIT INDEX

Exhibit Number	Description
10.2	First Amendment to the Executive Employment Agreement, dated November 6, 2012, between Argo Group International Holdings, Ltd. and Mark E. Watson III
12.1	Statements of Computation of Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Share Dividends
31.1	Rule 13a – 14(a)/15d – 14(a) Certification of the Chief Executive Officer
31.2	Rule 13a – 14(a)/15d – 14(a) Certification of the Chief Financial Officer
32.1+	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2+	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS++	XBRL Instance Document
101.SCH++	XBRL Taxonomy Extension Schema Document
101.CAL++	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF++	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB++	XBRL Taxonomy Extension Label Linkbase Document
101.PRE++	XBRL Taxonomy Extension Presentation Linkbase Document

+ This exhibit shall be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

++ As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report or amendment thereto to be signed on its behalf by the undersigned thereunto duly authorized.

	ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
November 9, 2012	By:	/s/ Mark E. Watson III
		Mark E. Watson III
		President and Chief Executive Officer
November 9, 2012	By:	/s/ Jay S. Bullock
		Jay S. Bullock
		Executive Vice President and Chief Financial Officer

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