Index to Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 20092010

or

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)

(441) 296-5858

(Registrant’s telephone number, including area code)

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

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

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [X]  No [  ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [  ]  No [X]

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]

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

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

As of June 30, 2009,2010, the aggregate market value of the common stock held by non-affiliates was approximately $859.8$901.2 million.

As of February 25, 2010,16, 2011, the Registrant had 31,004,64931,230,481 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III: Excerpts from Argo Group International Holdings, Ltd.’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 4, 20103, 2011

Index to Financial Statements

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

Annual Report on Form 10-K

For the Year Ended December 31, 20092010

TABLE OF CONTENTS

Index to Financial Statements

Forward Looking Statements

Certain statements in this document are “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 and are made pursuant to the safe harbor provisions of that act. Some of the forward-looking statements can be identified by the use of forward-looking words such as “believes”, “expects”, “potential”, “continued”, “may”, “will”, “should”, “seeks”, “approximately”, “predicts”, “intends”, “plans”, “estimates”, “anticipates” or the negative version of those words or other comparable words. The forward-looking statements are based on the current expectations of Argo Group International Holdings, Ltd. (“Argo Group”Group,” “we” or the “Company”) and itsour beliefs concerning future developments and their potential effects on the Company.Argo Group. There can be no assurance that actual developments will be those anticipated by the Company.Argo Group. Actual results may differ materially as a result of significant risks and uncertainties including but not limited to:

These risks and uncertainties are discussed in greater detail in Item 1A “Risk Factors.” The Company undertakesWe undertake no obligation to publicly update any forward-looking statements.

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PART I.I

Item 1.  Business

Business Overview

Argo Group International Holdings, Ltd. (“Argo Group”Group,” “we” or the “Company”) is an international underwriter of specialty insurance and reinsurance products in the property and casualty market. Argo Group is the result of a merger in 2007 between Argonaut Group, Inc. and PXRE Group Ltd. (“PXRE”) (the “Merger”). The Company targetsWe target niches in which itwhere we can develop a leadership position and which the Company believeswe believe will generate superior underwriting profits. ItsOur growth has been achieved both organically through an operationaloperating strategy focused on disciplined underwriting discipline and as a result of strategic acquisition activity.acquisitions.

Index to Financial Statements

Following is a summary organization chart for the Company:Argo Group:

Business Segments and Products

For the year ended December 31, 2009,2010, Argo Group’s operations included four ongoing business segments: Excess and Surplus Lines, Commercial Specialty, Reinsurance and International Specialty. Additionally, the Company haswe have a Run-off Lines segment for products itwe no longer underwrites.underwrite. For discussion of the operating results of each business segment, please refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 39 - 7042-72 and Note 14, “Segment Information” in the Notes to the Consolidated Financial Statements.

Excess and Surplus Lines.Lines (“E&S”). Excess and surplus lines carriers focus on risks that the standard (admitted) market is unwilling or unable to underwriteunderwrite. The lack of insurers willing to offer such coverage is often due to the unique risk characteristics of the insureds, or the lack of insurers willing to offer such coverage because of the perils involved, the nature of the business, or the insured’s loss experience. Excess and surplus lines carriers are able to underwrite these risks with more flexible policy terms at unregulated premium rates on a non-admitted basis.

Three operations are included in Argo Group’s Excess and Surplus LinesIn 2010, our E&S business segment:segment consisted of three operating platforms: Colony Group (“Colony”), Argonaut Specialty and Argo ProPro. In the fourth quarter of 2010, we announced the restructuring of this segment and the consolidation of Colony and Argonaut Specialty under a unified platform branded “Colony Specialty. These three” For purposes of this annual report, we continue to refer separately to Colony and Argonaut Specialty consistent with the manner in which we managed and reported on these operations focusduring 2010. While focused primarily on underwriting surplus lines coverage but anyon a non-admitted basis, each of the threethese operations may also underwrite certain classes of business on an admitted basis for insureds with risk profiles that meet the Company’sour underwriting standards.

Colony focuses on a broad class of risks that the standard market chooses not to underwrite. Its operations are divided into three focusedunderwrite, operating through four divisions: liability, propertyCasualty, Property, Transportation and automobile.Binding Authority. Colony provides coverage to a broad group of commercial enterprises including restaurants, contractors, day care centers, apartment complexes, condominium associations, manufacturers and distributors. A portion of its business, primarily transportationTransportation (commercial automobile) coverage, is written on an admitted basis.

Index to Financial Statements

Argo Pro is comprised of four divisions: Allied Medical, (“AM”), Errors & Omissions, (“EO”), Environmental (“ENV”) and Insight. AMThe Allied Medical division targets medical facilities within the social services, miscellaneous healthcare, and long term care segments. EOThe Errors & Omissions division targets insurance agents, lawyers, miscellaneous EO,professions, employment practices and real estate related EO accounts. ENVThe Environmental division offers package policies for environmental consultants and contractors, storage tanks, dry cleaners pollution liability as well as other environmental related liability exposures. Our Insight division offers coveragescoverage for architects and engineers, accountants and insurance agents. All Argo Pro divisions focus on small to medium size risks.risks on both an admitted and non admitted basis.

Argonaut Specialty underwrites risks, primarily on an excess and surplus lines basis, which are slightly larger in size and complexity than those traditionally targeted by Colony. It underwrites primary casualty and excess/umbrella coverages for hard to place risks and/or distressed businesses that fall outside of the standard insurance market’s risk appetite. Primary casualty risks comprised 55%61% of Argonaut Specialty’s premium volume in 2009.2010. The excess/umbrella casualty division accounted for 45%39% of Argonaut Specialty’s premium volume during 2009.2010.

Commercial Specialty. This segment provides property casualty and surety coverages designed to meet the specialized insurance needs of businesses within certain well defined markets. It targets business classes and industries with distinct risk profiles that can benefit from specially designed insurance programs, tailored loss control and expert claims handling. This segment serves its targeted niche markets with a narrowly focused underwriting profile and a uniquean understanding of the businesses it serves. Five operations are included in the Company’sIn 2010, our Commercial Specialty segment:segment consisted of the following operations: Argo Select, Rockwood, Casualty Insurance Company (“Rockwood”), Trident Insurance Services (“Trident”),Commercial Programs and Product DevelopmentAlteris and Argo Surety. During the fourth quarter of 2010, we also announced the acquisition of ARIS Title Insurance Corporation, a statutory insurance company licensed by the New York State Department of Insurance to provide art title insurance that serves the needs of the art marketplace and related fiduciary banking, legal, museum and non-profit communities.

The core operations of Argo Select consist of Grocery, Restaurants, and Specialty Retail (including dry cleaners, commercial launderers, convenience stores, and retail furniture stores). In addition, Argo Select partnerspartnered with First Insurance Company of Hawaii (“FICOH”) to provideproviding stand-alone hurricane coverage for personal lines policies on the Hawaiian Islands.in that state, a program that was discontinued in 2010. Approximately 44%48% of Argo Select’s 20092010 gross written premium was from the Grocery segment, followed by 18% from Restaurants, 15%24% in Specialty Retail, 8%16% from Restaurants, 9% from FICOH, and 2% from our discontinued Religious Organizations (churches and other houses of worship), 8% from Hospitality, and 7% from FICOH.lines. Argo Select provides property, liability, workers compensation, auto, and umbrella coverage throughout the United States. In November 2009,the last quarter of 2010, we announced that Argo Select announcedwould be marketed going forward under the “Argo Insurance” brand, a unified brand which also includes non-U.S. retail products that it was discontinuing programs for Hospitality and Religious Organizations.we offer independently of our Argo International operation.

Rockwood is recognized as a leading specialty underwriter of workers compensation for the mining industry. It also underwrites business coverage for small commercial businesses including office, retail operations, light manufacturing, services, and restaurants. Rockwood’s strategy includes a strong commitment to its insureds, a highly experienced staff, and a dedication to the individualselective underwriting of individual risks. Approximately 54%52% of its premiums are written in Pennsylvania where it is the largest workers compensation insurer of independent coal mines. Rockwood underwrites policies on both a large deductible basis and on a guaranteed cost basis for smaller commercial accounts. In addition, Rockwood provides supporting general liability, pollution liability, umbrella liability, property, commercial automobile and surety coverage,coverages, for certain of its mining accounts. These supporting lines of business represented less thanapproximately 16% of Rockwood’s gross written premiums in 2009.

Trident functions as both an underwriter and a managing general agency and is a nationally recognized program manager providing insurance products for small to intermediate sized accounts in targeted sectors. Trident manages programs serving public entities, public schools, special districts, private education (K-12), home heating dealers, propane dealers, student transportation, septic contractors, waste haulers and lawyers. Trident offers a full range of solutions including program management, administration, professional claims and loss control services on a fee basis for pools as well as fully insured solutions for individual accounts in the sectors it serves. Its product lines include general liability, automobile liability, automobile physical damage, property, inland marine, crime, public official’s liability, educator’s legal liability, employment practices, law enforcement liability, environmental liability, lawyers professional liability, student accident, police and firefighters accident, workers compensation, inmate medical and tax interruption.

The Commercial Specialty Program and Product Development unit works with Program Administrators to develop specialized commercial programs in target segments of the industry. They seek to partner with Program Administrators which provide an expertise in particular field, have a proven record of managing profitable programs, have an established distribution network and are equipped to handle responsibilities such as marketing, underwriting, rating and policy issuance subject to Argo oversight.2010.

Argo Surety is an underwriting unit offeringoffers surety products to a diverse range of U.S. businesses operating in numerous industries. The focus of Argo Surety is to deliver high-quality surety credit solutions to businesses that must satisfy various eligibility conditions in order to conduct commerce, such as licensure requirements promulgated by government statute or regulation, counterparty conditions found in private or public construction projects or satisfactory performance of contracted services. Surety products are commonly grouped into two broad categories referred to as Contract Bonds and Commercial Bonds. Contract bonds are typically third-party performance, payment or maintenance guarantees associated with construction projects, whereas commercial bonds are generally required of businesses that guarantee their compliance with regulations and statutes, or the payment and performance assurance for various forms of contractual obligations, or the completion of services.

Index to Financial Statements

Argo Surety targets themultiple industries including but not limited to construction (general, trade and service contractors), manufacturing, transportation, energy (coal, oil & gas and waste), manufacturing,industrial equipment, technology, retail, public utilities, and healthcare.

Commercial Programs (formerly Programs & Product Development) partners with retail insurance program administrators to develop specialized commercial programs in niche markets. They work with Program Administrators who have expertise in a particular field, a proven record of managing profitable programs, and an established distribution network. The typical Program Administrator selected for Alteris Commercial Programs is equipped to handle responsibilities such as marketing, underwriting, rating and policy issuance subject to our oversight. Target markets for this division include retail and service industries, such as landscaping operations, forestry/logging operations, wineries, and industries related to pet care. Specialty programs are also provided for building management/maintenance companies, community and condominium associations, and landlords (lease guarantee program).

Alteris focuses on specialty programs and alternative risks solutions for selected niche markets, operating through the following divisions: Trident, Alteris Public Risk Solutions and and Alteris Alternative Risk Solutions (formerly Corporate Accounts).

Reinsurance. The Reinsurance segment underwrites international and U.S. reinsurance business. Thebusiness through the segment’s primary business platform, is Argo Re, Ltd., a Bermuda Class 4 insurance company (“Argo Re”). Argo Re also maintains offices through its subsidiary, Argo Solutions, S.A., in Belgium. The Reinsurance segment also operates a Casualty and Professional Lines division that provides primary excess coverage for general and products liability, Directors and Officers liability, Errors and Omissions liability, and Employment Practices Liability for global clients.

The Casualty and Professional Lines division accounted for approximately 29% of the Reinsurance business segment’s premium volume in 2010. In the last quarter of 2010 we announced that going forward, products offered by this division will be marketed under the unified Argo Insurance brand as Argo Insurance Worldwide Professional Lines and Argo Insurance Worldwide Casualty Lines.

Argo Re focuses on underwriting property catastrophe excess of loss reinsurance for a relatively small number of cedantscedents whose accounts are known by Argo Rethe division’s underwriters. Argo Re will also underwrite property per risk and pro rata reinsurance on a select basis. The business writtenReinsurance underwritten by Argo Re covers underlying exposures which are located throughout the world including the United States.

Property catastrophe reinsurance generally covers claims arising from large catastrophes around the worldcatastrophic events such as hurricanes, windstorms, hailstorms, earthquakes, volcanic eruptions, fires, industrial explosions, freezes, riots, floods and other man-made or natural disasters. In underwriting the property catastrophe portfolio, exposures are diversified geographically and by peril in order to manage the risks assumed and maximize return.

During 2009, Argo Re launched a “Casualty and Professional” division

Index to underwrite primary excess casualty insurance business to global clients and Errors and Omissions and Directors and Officers insurance business to large corporations.

Financial Statements

International Specialty. The International Specialty segment is focused on underwriting worldwide property and non U.S.non-U.S. liability insurance on behalf of one underwriting syndicates,syndicate, under the Lloyd’s of London (“Lloyd’s”) global franchise. The segment’s business platform, Argo International, (formerly known as Heritage Underwriting Agency plc),is based in London isand comprised of three principal components:

Argo International obtains its underwriting capital from a variety of sources and seeks to maintain a balance between capital managed on behalf of third parties and investmentcapital managed on behalf of its own capital.Argo Group. The sources of the underwriting capital for the International Specialty segment include the Company’sour interest provided through Argo International and Argo Re, third party capital participants referred to as Trade Capitaltrade capital providers and third party capital attributable to individual members referred to as Names and Other Capital. Trade Capital reinsurerscapital providers participate either on a quota share basis or participate directly through the syndicate, assuming 100% of their contractual participation in the syndicate results with such results settled on a year of account basis. The flexibility in the sources of capital allows Argo International to manage its underwriting exposure over the insurance cycle with a view to maximizing profitability.

The table below represents the Company’sour participation in the syndicates it managessyndicate we manage by year of account:

In order to diversify risk and make more efficient use of capital, Syndicate 3245, which was writing a portion of the Argo International business, was merged into Syndicate 1200 beginning with the 2008 year of account, following which the combined underwriting activities have been carried out by two divisions within Syndicate 1200.

Argo International earns its income from return on the underwriting capital that is provided from its own resources, investment income on its capital resources and from commission earned from the management of third party capital. This commission is largely linked to profits earnedgenerated on behalf of such capital.

Argo International’s worldwide property division concentrates mainly on underwriting short-tail risks with an emphasis on commercial property which are also exposed to catastrophes and other man-made or natural disasters. In underwriting the property portfolio, exposures are diversified geographically and by peril in order to manage the risks assumed and maximize return. The division maintains a flexible approach to underwriting and attempts to identify and respond to opportunities in territories and classes of business as they arise.

Argo International’s liability division underwrites non-U.S. professional indemnity, international general liability and directors & officers insurance. In addition, approximately 3% of the syndicate premium income is written on a range of U.S. general liability risks.

Within these sectors the underwritersUnderwriters leverage opportunities across geographies and risk layers.layers within each of their divisions. Business is evaluated against risk and return requirements. Operating through Lloyd’s global franchise, Argo International is able to select the markets it operates in by their position in the insurance cycle and thus seek the most profitable business. Lloyd’s business is often boundwritten on a syndicate basis across multiple syndicates.the market. Argo International is the lead underwriter on a high proportionapproximately 40% of the business it underwrites.

Marketing and Distribution

Argo Group providesWe provide products and services to well defined niche markets. Argo Group leverages the Company’sWe leverage our capital strength and brandthe Argo Group brands by cross-marketing the products providedoffered by each of our segments among our other platforms and divisions the various operating companies. Argo Group offers itsWe offer our distribution partners tailored, innovative solutions for managing risk using the full range of products and services available within the Company.we have available.

Excess and Surplus Lines. Colony distributes its products through a network of appointed wholesale excess and surplus lines agents and brokers.brokers specializing in excess and surplus lines and certain targeted admitted lines. Approximately 69%71% of Colony’s premium volume during 20092010 was produced through Colony wholesale agents that are appointed to underwrite, quote and issue policies subject to stringentstated underwriting parameters providedauthorized by Colony. The remaining 31%29% of Colony’s premium volume in 20092010 was produced by Colony wholesale agents and brokers who submit that brokerage business to Colony underwriters for quoting and issuance by Colony personnel. Argo Pro uses wholesale brokers in Allied Medical, Errors & Omissions and Environmental as well as retail agents for Insight’s products. Argonaut Specialty uses a select network of appointed excess and surplus lines brokers to distribute its products.

Index to Financial Statements

Commercial Specialty.Specialty. Commercial Specialty’s distribution is multi-faceted, utilizing retail agents, direct to the insured, program managers and wholesale agents. Rockwood distributes its product lines through a network of independent retail and wholesale agents. Argo Select products and services are distributed through selected independent agents, brokers, wholesalers and program managers with demonstrated expertise in one or more of its targeted niche markets and through its in-house managing general agent and on a direct basis in a limited number of states. TridentAlteris provides its insurance products and related services to the public entity sector through licensed retail agents and brokers in eligible states. Trident has a limited number of statewideselected state program managers for its Trident public entity operations, and exclusive distribution agency partners in select states.through selected brokers, wholesalers and program managers within the specialty markets served by its other divisions. Argo Surety distributes its products through selected surety specialty agents and brokers across the United States.

Reinsurance. Argo Re has obtained substantially all of its insurance and reinsurance business through brokers and intermediaries who represent clients in negotiations for the purchase of reinsurance. None of the intermediaries through which Argo Re obtains this business are authorized to arrange anybind insurance business in the Company’sour name without itsour approval. Argo Re pays commissions to these intermediaries or brokers that vary in size based on the amount of premiums and type of business assumed by Argo Re. The Casualty and Professional Lines division distributes its products through selected brokers who have established their credentials and experience with our underwriters through prior dealings.

International Specialty.Argo International obtains underwriting business from two main sources: the Lloyd’s open market, whereand underwriting agencies with delegated authority. In the Lloyd’s open market, brokers approach the underwritersArgo International directly with individual insurance risk opportunities and delegated authority to otherfor consideration by our underwriters. Brokers also approach Argo International through selected underwriting agencies (wherethat have been granted limited authority delegated by Argo International delegates theto make underwriting decisiondecisions on individual risks to agencies which it has granted limited underwriting authority. In general, risks written on the open market business are larger than risks written on our behalf by authorized agencies to which delegated authority has been given in both terms of both exposure and premium volume.premium.

Competition

The Company’sWe compete in a variety of markets against a variety of competitors. While Argo Group’s principal direct insurance competitors cannot be easily summarized. The Company’ssummarized our principal lines of business are written by numerous other insurance companies.companies as well. Competition for any one account may come from very large international firms or smaller regional companies in the domiciles in which the Company operates.we operate.

To remain competitive, the Company’sour strategy includes, among other measures, (1) focusing on rate adequacy and underwriting discipline, (2) leveraging itsour distribution network, (3) controlling expenses, (4) maintaining financial strength and issuer credit ratings, (5) providing quality services to agents and policyholders and (6) acquiring suitable property and casualty books of business.

Excess and Surplus Lines.Lines. Competition within the excess and surplus lines marketplace comes from a wide range of carriers. In addition to mature companies that operate nationwide, there is competition from carriers formed in recent years. The Excess and Surplus Lines segment may also compete with national and regional carriers from the standard market willing to underwrite selected accounts on an admitted basis.

Commercial Specialty.Specialty. Due to the diverse nature of the products offered by the Commercial Specialty segment, competition comes from various sources. The majority of the competition comes from regional companies or regional subsidiaries of national carriers in the domiciles in which they operate. National carriers tend to compete for larger accounts along all product lines. Competition for the Company’sour public entity products is primarily from small to medium size commercial insurers as well as from state and regional risk pools.

Reinsurance.Reinsurance.Argo Re competes with numerous reinsurance and insurance companies. These competitors, many of whom have higher credit ratings and substantially greater financial, marketing and management resources than Argo Re, include independent insurance and reinsurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain commercial insurance companies and underwriting syndicates.

Index to Financial Statements

International Specialty.Specialty.The principal lines of business in this segment are written by numerous other insurance companies and syndicates at Lloyd’s. Competition for any one account may come from other Lloyd’s syndicates, international firms or smaller regional companies. To remain competitive, Argo International’s strategy includes, among other measures, leveraging the Lloyd’s brand.

Ratings

The Company’sFinancial Strength Ratings are an important factor in establishing the competitive position of insurance and reinsurance subsidiaries have a Financial Strength Rating fromcompanies. A.M. Best Company (“A.M. Best”). A.M. Best’s ratings are used by insurance buyers, agents, brokers and other insurance companies asStandard & Poor’s (“S&P”) have each developed a rating system to provide an indicatoropinion of an insurer’s or reinsurer’s financial strength and security and are not intendedability to reflectmeet ongoing obligations to its policyholders. Each rating reflects the qualityrating agency’s opinion of the rated company for investment purposes. capitalization, management and sponsorship of the entity to which it relates, and is neither an evaluation directed to investors in our common shares nor a recommendation to buy, sell or hold our common shares.

A.M. Best assigns Financial Strength Ratingsratings current range from “A++” (Superior) to “F” (In Liquidation) and include 16 separate ratings categories. S&P maintains a letter scale rating system ranging from “A++ (Superior)”“AAA” (Extremely Strong) to “S (Rating Suspended).” The Company’s“R” (under regulatory supervision) and includes 21 separate ratings categories. With the exception of ARIS Title Insurance Corporation which has yet to be rated, all of our insurance and reinsurance companies have a Financial Strength Rating of “A“A” (Excellent)” with a stable outlook from A.M. Best.

Standard & Poor’s Rating Services (“S&P”) assigns Financial Strength Ratings ranging from “AAA (Extremely Strong)” to “R (Regulatory Action)” with plus or minus designations for categories from AA to CCC to designate the relative standing within the category. The Company’sBest, and our U.S. insurance subsidiaries have been rateda Financial Strength Rating of “A-” (Strong)” with a stable outlook byfrom S&P.

In addition, Argo Group US, Inc. has an Issuer Credit Rating of “BBB-” (Good)” with a stable outlook from S&P.

As part of the Lloyd’s, Argo International sharesoperates as a Lloyd’s ratingsyndicate, and therefore, benefits from the ratings assigned to Lloyd’s rather than being rated independently.receiving an independent rating. As all Lloyd’s policies are ultimately backed by the Lloyd’s Central Fund, a single market rating is applied. Lloyd’s, as a market, is rated “A“A” (Excellent)” by A.M. Best and “A+” (Strong) by S&P.

Regulation

General

The business of insurance and reinsurance is regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another. The principal jurisdictions of Argo Group’sin which our insurance and reinsurance operationssegments operate are Bermuda, the United States and the United Kingdom. Argo Group isWe are also regulated by other countries where it doeswe do business.

Bermuda

As a holding company, Argo Group iswe are not currently subject to Bermuda insurance regulations. However, the Insurance Act of 1978 and related regulations, as amended (together, the “Insurance Act”), regulategovern the insurance business activities of Argo Re, the Company’sour operating subsidiary in Bermuda, and provide that no person may carry on the insurance business in or from within Bermuda unless registered as an insurer by the Bermuda Monetary Authority (the “BMA”). Under the Insurance Act, no distinction is made between insurance and reinsurance business.

Classification of Insurers

The Insurance Act distinguishes between special purpose insurers, insurers carrying on long-term business and insurers carrying on general business. There are six classifications of insurers carrying on general business, with Class 4 insurers subject to the strictest regulation. Argo Re, which is incorporated to carry on general insurance and reinsurance business, is registered as a Class 4 insurer in Bermuda and is regulated as such under the Insurance Act.

Principal Representative

An insurer is required to maintain a principal office in Bermuda and to appoint and maintain a principal representative in Bermuda.

Index to Financial Statements

Solvency and Group Regulation

Regulators in Bermuda and other jurisdictions in which we operate are considering various proposals for financial and regulatory reform. In particular, Bermuda continues to enhance its risk-based regulatory regime, which is intended to meet or exceed international standards. The directives covering this regime are often referred to as Solvency II. Many of the areas covered under this initiative will be phased over a number of years. The BMA’s aim is to create a regime which has three core components: (1) Capital Adequacy, (2) Governance and Risk Management, and (3) Disclosure. Most of these elements are interconnected and potentially influenced by developments in other international regimes. As a risk-based capital regime necessitates a strong system of governance and risk management, which reflects the integration of risk and capital management, the BMA has issued its “Insurance Code of Conduct” in February 2010, allowing the market to be fully compliant by 1^st July 2011.

Additionally, Bermuda is striving to become recognized by the EU as having an “equivalent solvency regime” in an effort to benefit Bermuda-based companies by utilizing recognition agreements which would acknowledge equivalent solvency requirements and protect these insurers and reinsurers from having to fulfill the solvency requirements under various and differing regimes.

Furthermore, Solvency II-like directives will result in the appointment of a designated “group supervisor” to oversee the group’s overall risk and solvency situation. BMA has asserted that it believed itself to be the proper Group Supervisor for Argo Group.

Argo Re

Effective December 31, 2007, Argo Group amalgamated its two Bermuda reinsurers, Peleus Re and PXRE Reinsurance Ltd. (“PXRE Bermuda”), with Peleus Re as the continuing company. Peleus Re, prior to the amalgamation, was a Class 3 general business insurer, and PXRE Bermuda was a Class 4 general business insurer. As a result of the amalgamation, Peleus Re was granted a Class 4 license under the Insurance Act. Effective April 7, 2008, the name of Peleus Re was changed to Argo Re.Re, Ltd.

The Insurance Act imposes on Bermuda insurance companies, including Argo Re, solvency and liquidity standards and auditing and reporting requirements, and grants to the BMA powers to supervise, investigate and intervene in the affairs of insurance companies. Specifically, the Insurance Act provides that the value of the general business assets of a Class 4 insurer must exceed the amount of its general business liabilities by an amount greater than the prescribed minimum solvency margin. Argo Re, as a Class 4 insurer, is required to maintain a minimum solvency margin equal to the greatest of: (a) $100.0 million, (b) 50% of net premiums written (with a deduction for ceded reinsurance from gross premiums written not exceeding 25% of gross premiums written) or (c) 15% of loss reserves. In addition, Argo Re is prohibited from declaring or paying any dividends during any financial year it is in breach of its minimum solvency margin or minimum liquidity ratio or if the declaration or payment of such dividends would cause it to fail to meet such margin or ratio. If it fails to meet its minimum solvency margin or minimum liquidity ratio on the last day of any financial year, the insurer will be prohibited, without the approval of the BMA, from declaring or paying any dividends during the next financial year. If Argo Re’s total statutory capital and surplus falls to $75.0 million or less, it will have to comply with additional reporting requirements as mandated by the BMA.

The Insurance Act was amended in 2008 to introduce, among other things, the Bermuda Solvency Capital Requirement model (the “BSCR”) which issets out a standard mathematical model designed to give the BMA more advanced methods for determining an insurer’s capital adequacy.adequacy: the Bermuda Solvency Capital Requirement model (the “BSCR”). Insurers may also apply in-house models that deal with their own particular risks and where such models satisfy the standards established by the BMA, such insurers may apply to the BMA to use such models in lieu of the BSCR. The amount calculated in accordance with the BSCR or a company’s approved in-house model is referred to as its enhanced capital requirement (“ECR”). Argo Re calculates its ECR in accordance with the BSCR.

In addition to the BMA’s powers under the Insurance Act to issue directions, where the BMA concludes that the risk profile of an insurer deviates significantly from (a) the assumptions underlying the enhanced capital requirement applicable to it or (b) from the insurer’s own assessment of its risk management policies and practices in calculating its own enhanced capital requirement, the BMA may, subject to compliance with the relevant provisions of the Act, make such adjustments to an insurer’s enhanced capital requirement and available statutory capital and surplus as it considers appropriate.

Underlying the BSCR is the belief that all insurers should operate with a view to maintaining their capital at a prudent level in excess of the minimum solvency margin prescribed under the Insurance Act. Currently all Class 4 insurers, including Argo Re, are expected to maintain their capital at a target level that is set at 120% of the ECR. At December 31, 2009,2010, Argo Re exceeded the target level.

Index to Financial Statements

The Insurance Act provides a minimum liquidity ratio for general business. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include cash and time deposits, quoted investments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiums receivable and reinsurance balances receivable. There are certain categories of assets that, unless specifically permitted by the BMA, do not automatically qualify as relevant assets; these include unquoted equity securities, investments in and advances to affiliates, real estate and collateral loans. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax and sundry liabilities (by interpretation, those not specifically defined).

AtAs of December 31, 2009,2010, Argo Re’s solvency and liquidity margins and statutory capital and surplus were in excess of the minimum levels required by the Insurance Act.

As a registered Class 4 insurer, Argo Re is required to submit an opinion of its approved loss reserve specialist with its statutory financial return in respect of its loss and loss expense reserves. The appointment of a loss reserve specialist, who will normally be a qualified casualty actuary, must be approved by the BMA. Argo Re has appointed a loss reserve specialist who has been approved by the BMA to serve in such capacity.

Any person who, directly or indirectly, becomes a holder of at least 10 percent, 20 percent, 33 percent or 50 percent of Argo Group’sour common shares must notify the BMA in writing within 45 days of becoming such a holder or 30 days from the date they have knowledge of having such a holding, whichever is later. The BMA may, by written notice, object to such a person if it appears to it that the person is not fit and proper to be such a holder. The BMA may require the holder to reduce its holding of Argo Group’sour common shares and direct, among other things, that voting rights attaching to the common shares shall not be exercisable.

Dividends

The payment of dividends by Argo Re is limited under the Insurance Act. Argo Re is prohibited from declaring or paying any dividends during any financial year it is in breach of its minimum solvency margin or minimum liquidity ratio or if the declaration or payment of such dividends would cause it to fail to meet such margin or ratio. If it fails to meet its minimum solvency margin or minimum liquidity ratio on the last day of any financial year, the insurer will be prohibited, without the approval of the BMA from declaring or paying any dividends during the next financial year. As of December 31, 2009,2010, Argo Re’s solvency and liquidity margins and statutory capital and surplus were in excess of the minimum levels required by the Insurance Act. As of December 31, 2009,2010, the unaudited statutory capital and surplus of Argo Re was estimated to be $1,269.2$1,251.0 million and the amount required to be maintained was estimated to be $239.9$268.7 million. As of December 31, 2009,2010, Argo Re’s total investments in subsidiaries and amounts due from its parent company, Argo Group, in its statutory balance sheet were approximately $766.4$761.6 million.

In March 2010, Argo Re paid a cash dividend of $17.5 million to Argo Group. Argo Re did not pay dividends to Argo Group in 2009 and 2008.

United States

State Insurance Regulation

The Company’s USArgo Group’s U.S. insurance subsidiaries are subject to the supervision and regulation of the states in which they are domiciled. The CompanyWe currently has elevenhave twelve insurance companies domiciled in five states (the “U.S. Subsidiaries”). Argo Group, as the indirect parent of the U.S. Subsidiaries, is subject to the insurance holding company laws of Illinois, Louisiana,New York, Ohio, Pennsylvania and Virginia. These laws generally require each of the U.S. Subsidiaries to register with its respective domestic state insurance department and to furnish annually financial and other information about the operations of the companies within the holding company group. Generally, all material transactions among companies in the holding company group to which any of the U.S. Subsidiaries is a party, including sales, loans, reinsurance agreements and service agreements, must be fair and, if material or of a specified category, require prior notice and approval or non-disapproval by the insurance department where the subsidiary is domiciled. Transfers of assets among such affiliated companies, certain dividend payments from insurance subsidiaries and certain material transactions between companies within the group may be subject to prior notice to, or prior approval by, state regulatory authorities. Such supervision and regulation is designed to protect the Company’sour policyholders rather than the Company’sour shareholders. Matters relating to authorized lines of business, underwriting standards, financial condition standards, licensing of insurers, investment standards, premium levels, policy provisions, the filing of annual and other financial reports prepared on the basis of Statutory Accounting Principles, the filing and form of actuarial reports, dividends, and a variety of other financial and non-financial matters are also areas that are regulated and supervised by the state in which the Company’sour insurance subsidiaries are domiciled.

Index to Financial Statements

Guarantee Associations

The Company’sOur U.S. insurance subsidiaries are participants in the statutorily created insolvency guarantee associations in all states where they are admitted licensed carriers. These associations were formed for the purpose of paying claims of insolvent companies. The Company isWe are assessed itsour pro rata share of such claims based upon itsour premium writings, subject to a maximum annual assessment per line of insurance. Such costs can generally be recovered through surcharges on future premiums. Non-admitted business is neither supported by or subject to guaranty assessments.

Dividends

Effective December 31, 2007, Argonaut Group, Inc. and PXRE Corporation, two of our intermediate holding companies of Argo Group, merged. PXRE Corporation was the surviving entity and was renamed Argonaut Group, Inc. Effective April 7, 2008, Argonaut Group, Inc. was renamed Argo Group US, Inc. (“Argo Group US”). As a result of the merger, all of the Company’sour U.S. Subsidiaries became subsidiaries of Argo Group US.

As an insurance and reinsurance holding company, the CompanyArgo Group is largely dependent on dividends and other permitted payments from itsour insurance subsidiaries to pay cash dividends to itsour shareholders, for debt service and for itsour operating capital. The ability of the Company’sour insurance subsidiaries to pay dividends to the CompanyArgo Group is subject to certain restrictions imposed by the jurisdictions of domicile that regulate the Company’sour immediate insurance subsidiaries and each jurisdiction has calculations for the amount of dividends that an insurance company can pay without the approval of theits insurance regulator. Argo Group US is able to receive dividends from its direct subsidiaries: Argonaut Insurance Company, Colony and Rockwood. For the year ended December 31, 2009,2010, Colony paid an extraordinarya dividend to Argo Group US in the amount of $90.0 million.$50.0 million in the form of $25.2 million in cash and $24.8 million in securities. The dividend was paid after receiving approval fromand notice was provided to the Virginia Bureau of Insurance. Additionally,For the year ended December 31, 2010, Rockwood paid an extraordinary dividend to Argo Group US in the amount of $15.0$30.0 million. The dividend was paid after receiving approval from the Pennsylvania Department of Insurance. For the year ended December 31, 2010, Argonaut Insurance Company paid a dividend to Argo Group US in the amount of $25.0 million. During 2010,2011, Argonaut Insurance Company may be permitted to pay dividends of up to $56.8$13.0 million in cash without approval from the Illinois Department of Insurance, based on the state of domicile’s ordinary dividend calculation. Colony may be permitted, during 2011, to pay dividends of up to $36.8$53.5 million in cash without approval from the Virginia Bureau of Insurance, based on the state of domicile’s ordinary dividend calculation. Rockwood may be permitted, during 2011, to pay dividends of up to $15.6$13.7 million in cash without approval from the Pennsylvania Department of Insurance, based on the state of domicile’s ordinary dividend calculation. Business and regulatory considerations may impact the amount of dividends actually paid, and prior approval of dividend payments may be required.

State laws require prior notice or regulatory agency approval of direct or indirect changes in control of an insurer, reinsurer, or its holding company, and of certain significant inter-corporate transfers of assets within the holding company structure. An investor who acquires or attempts to acquire shares representing or convertible into more than 10% of the voting power of the securities of the CompanyArgo Group would become subject to at least some of such regulations, would require approval by the five regulators of the Company’sArgo Group’s U.S. Subsidiaries prior to acquiring such shares and would be required to file certain notices and reports with the five regulators prior to such acquisition.

The Terrorism Risk Insurance Program Reauthorization Act

The Terrorism Risk Insurance Program Reauthorization Act of 2007 was signed into law by the U.S. President on December 26, 2007. This law renews the prior federal terrorism risk insurance program through December 31, 2014. The program includes protections for acts of domestic terrorism. The insurer deductible is fixed at 20% of an insurer’s direct earned premium, and the federal share of compensation is fixed at 85% of insured losses that exceed insurer deductibles.deductibles, subject to a $100 billion cap. The U.S. Treasury Department is required to promulgate regulations to determine the pro-rata share of insured losses if they exceed the $100 billion cap. In addition, clear and conspicuous notice to policyholders of the $100 billion cap is required. Under the program reauthorization, the trigger at which federal compensation becomes available remains fixed at $100 million per year through 2014.

Index to Financial Statements

United Kingdom

FSA Regulations.

Argo International’s operations are regulated by the U.K. Financial Services Authority (“FSA”) and franchised by Lloyd’s of London. The FSA has substantial powers of intervention in relation to the Lloyd’s managing agents (such as Argo International) which it regulates, including the power to remove their authorization to manage Lloyd’s syndicates. In addition, each year the FSA requires Lloyd’s to satisfy an annual solvency test that measures whether Lloyd’s has sufficient assets in the aggregate to meet all outstanding liabilities of its members, both current and run-off. If Lloyd’s fails this test, the FSA may require Lloyd’s to cease trading and/or its members to cease or reduce underwriting.

Lloyd’s Regulations and Requirements.

Argo International’s operations are franchised by Lloyd’s. The Council of Lloyd’s has wide discretionary powers to regulate members’ underwriting at Lloyd’s. The Lloyd’s Franchise Board is responsible for setting risk management and profitability targets for the Lloyd’s market and operates a business planning and monitoring process for all syndicates, including reviewing and approving the syndicatessyndicates’ annual business plan. The Lloyd’s Franchise Board requires annual approval of Argo International’s business plan, including maximum underwriting capacity, and may require changes to any business plan presented to it or that additional capital to be provided to support underwriting. Lloyd’s also imposes various charges and assessments on its member’s. The Group has provided capital to Lloyd’s to support Argo (No 604) Ltd’s (the Group’s main corporate member) underwriting business at Lloyd’s.members. Dividends from a Lloyd’s managing agent and a Lloyd’s corporate member can be declared and paid provided it has sufficient profits available.

The GroupArgo International predominately participates in the Lloyd’s market through Argo (No 604) Ltd, a Lloyd’s corporate member. By entering into a membership agreement with Lloyds’s,Lloyd’s, Argo (No 604) Ltd undertakes to comply with all Lloyd’s bye-lawsby-laws and regulations as well as the provisions of the Lloyd’s Acts and FSMAFinancial Services and Markets Act 2000 that are applicable to it. The underwriting capacity of a member of Lloyd’s must be supported by providing a deposit (referred to as “Funds at Lloyd’s) in the form of cash, securities or letters of credit in an amount determined under the Individual Capital Adequacy regime of the FSA. The amount of such deposit is calculated for each member through the completion of an annual capital adequacy exercise. These requirements allow Lloyd’s to demonstrateevaluate that each member has sufficient assets to meet its underwriting liabilities plus a required solvency margin.

If a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund, which in many respects acts as an equivalent to a state guaranty fund in the United States. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members. The Council of Lloyd’s has discretion to call or assess up to 3% of a member’s underwriting capacity in any one year as a Central Fund contribution.

Solvency II

The European Commission, which acts as the initiator of action and executive body of the EU, has introduced a new directive on insurance regulation and solvency requirements known as Solvency II. This directive was approved by the European Parliament in April 2009 and adopted by the European Council in November 2009. Currently, the European Commission is implementing the Directive and utilizing a three stage process of consultation with Member State regulators and insurance firms. The full implementation of Solvency II is set for December 31, 2012. Solvency II, which is a significant enhancement of the existing Solvency I framework, is the improved regulatory regime which will impose economic risk-based solvency requirements across all EU Member States and consists of three pillars: (1) Pillar I – quantitative capital requirements, based on a valuation of the entire balance sheet; (2) Pillar II – qualitative regulatory review, which includes governance, internal controls, enterprise risk management and supervisory review process; and (3) Pillar III – market discipline, which is accomplished through reporting of the insurer’s financial condition to regulators.

Argo International, Argo Group’s European-based operation at Lloyd’s of London, will be required to comply with Solvency II and is undertaking actions to be compliant by the imposed implementation date.

Dividends

Dividend payments from Argo International to its immediate parent are not restricted by regulatory authority. Dividend payments will be at the discretion of Argo International’s Board of Directors and will be subject to the earnings, operations, financial condition, capital and general business requirements of Argo International.

Index to Financial Statements

Reinsurance

As is common practice within the insurance industry, the Company’sArgo Group’s insurance and reinsurance subsidiaries transfer a portion of the risks insured under their policies by entering into a reinsurance treaty with another insurance company. Purchasing reinsurance protects primary carriers against the frequency and/or severity of losses incurred on the policies they issue, such as in the case of unusually serious occurrences in which a number of claims on one policy aggregate to produce an extraordinary loss on one policy or where a catastrophe generates a large number of serious claims on multiple policies at the same time. Reinsurance does not discharge the issuing primary carrier from its obligation to pay a policyholder for losses insured under its policy. Rather, the reinsured portion of each loss covered under a reinsurance treaty is ceded to the assuming reinsurer for reimbursement to the primary carrier. Because this creates a receivable owed by the reinsurer to the primary carrier, there is credit exposure with respect to losses ceded to the extent that any reinsurer is unable or unwilling to meet the obligations assumed under its reinsurance treaty. The ability to collect on reinsurance is subject to the solvency of the reinsurers, interpretation of contract language and other factors. The Company isWe are selective in regard to itsour reinsurers, seeking out those with strong financial strength ratings from A.M. Best or S&P. However, the financial condition of a reinsurer may change over time based on market conditions. The Company performsWe perform credit reviews on itsour reinsurers, focusing on, among other things, financial condition, stability, trends and commitment to the reinsurance business. In certain instances the Companywe also requiresrequire deposit of assets in trust, letters of credit or other acceptable collateral to support balances due from certain reinsurers whose financial strength ratings fall below a certain level or who transact business on a non-admitted basis in the case of the US subsidiaries in the state where the Company’sour insurance subsidiary is domiciled.

At December 31, 2009, the Company’s2010, Argo Group’s reinsurance recoverable balance totaled $1,379.4$1,203.9 million, net of an allowance for doubtful accounts of $9.9$15.7 million. The following table reflects the credit ratings for the reinsurers comprising the $1,379.4$1,203.9 million reinsurance recoverable balance at December 31, 2009:2010:

The top ten reinsurers, all rated A-A or higher, accounted for $936.6$802.7 million, or approximately 68%67% of the reinsurance recoverable balance as of December 31, 2009.2010. Management has concluded that all net balances are considered recoverable as of December 31, 2009.2010.

Additional information relating to the Company’sour reinsurance activities is included under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 39 - 7042-72 and Note 4, “Reinsurance” in the Notes to the Consolidated Financial Statements.

Reserves for Losses and Loss Adjustment Expenses

The CompanyArgo Group records reserves for specific claims incurred and reported, andas well as reserves for claims incurred but not reported. The estimates of losses for reported claims are established judgmentally on an individual case basis. Such estimates are based on the Company’sour particular experience with the type of risk involved and itsour knowledge of the circumstances surrounding each individual claim. Reserves for reported claims consider the Company’sour estimate of the ultimate cost to settle the claims, including investigation and defense of the claim, and may be adjusted for differences between costs originally estimated and costs re-estimated or incurred.

Reserves for incurred but not reported claims are based on the estimated ultimate cost of settling claims, including the effects of inflation and other social and economic factors, using past experience adjusted for current trends and any other factors that would modify past experience. The CompanyArgo Group uses a variety of statistical and actuarial techniques to analyze current claims costs, frequency and severity data, and prevailing economic, social and legal factors. Reserves established in prior years are adjusted as loss experience develops and new information becomes available. Adjustments to previously estimated reserves are reflected in results in the year in which they are made.

Index to Financial Statements

The estimate of reinsurance recoverables related to reported and unreported losses and loss adjustment expenses represent the portion of the gross liabilities that are anticipated to be recovered from reinsurers. Amounts recoverable from reinsurers are recognized as assets at the same time as, and in a manner consistent with, the gross losses associated with the reinsurance treaty.

The CompanyArgo Group is subject to claims arising out of catastrophes that may have a significant effect on its business, results of operations, and/or financial condition. Catastrophes can be caused by various events, including hurricanes, windstorms, earthquakes, hailstorms, explosions, power outages, severe winter weather, fires and by man-made events, such as terrorist attacks. The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event.

Terrorism peril is deemed by the CompanyArgo Group to include the damage resulting from various terrorist attacks through either conventional weapons or weapons of mass destruction such as nuclear or radioactive explosive devices as well as chemical and biological contaminants. The Company continuesWe continue to review itsour underwriting data in assessing aggregate exposure to this peril. The Company underwritesWe underwrite against the risk of terrorism with a philosophy of avoidance wherever possible.possible to the extent permitted by applicable law. For both property and casualty exposures, this is accomplished through the use of portfolio tracking tools that identify high risk areas, as well as areas of potential concentration. The Company estimatesWe estimate the probable maximum loss from each risk as well as for the portfolio in total and factorsfactor this analysis into the underwriting and reinsurance buying process. The probable maximum loss is a model generated, and subject to assumptions that may not be reflective of ultimate losses incurred for a terrorist act. The Company also seeks to mitigate this exposure through the use of reinsurance.

Additionally, the CompanyArgo Group has identified certain high risk locations and hazardous operations where there is a potential for an explosion or a rapid spread of fire due to a terrorist act. Through modeling, the Company continueswe continue to refine itsour estimates of the probable maximum loss from such an event and factorsfactor this analysis into the underwriting evaluation process and also seeksseek to mitigate this exposure through various policy terms and conditions (where allowed by statute) and through the use of reinsurance, to the extent possible. The Company’sOur current reinsurance arrangements either exclude terrorism coverage or significantly limit the level of coverage that is provided.

Terrorism exclusions are not permitted in the United States for workers compensation policies under the newUnited States federal actlaw or under the laws of any state or jurisdiction in which the Company operates.we operate. When underwriting existing and new workers compensation business, the Company considerswe consider the added potential risk of loss due to terrorist activity, including foreign and domestic, and this may lead us to decline to underwrite or to renew certain business. However, even in lines where terrorism exclusions are permitted, because the Company’sour clients may object to a terrorism exclusion in connection with business that the Companywe may still desire to underwrite without an exclusion, some or many of itsour insurance policies may not include a terrorism exclusion. Given the retention limits imposed under the USU.S. federal act and that some or many of the Company’sour policies may not include exclusion for terrorism, future foreign or domestic terrorist attacks may result in losses that have a material adverse effect on the Company’sour business, results of operations and/or financial condition.

The CompanyArgo Group has discontinued underwriting certain lines of business; however, the Company iswe are still obligated to pay losses incurred on these lines. Certain lines currently in run-off are characterized by long elapsed periods between the occurrence of a claim and any ultimate payment to resolve the claim. Included in Run-off Lines are claims related to asbestos and environmental liabilities arising out of other liability policies primarily written in the 1960s, 1970s and into the mid-1980s, with a limited number of claims occurring on policies written into the early 1990s. Also included in Run-off Lines is other business previously written and classified by PXRE as property catastrophe and Lloyd’s of London. Business formerly written in the Company’sour Risk Management segment is also classified in the Run-off Lines segment. Additional discussion on Run-off Lines can be found under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 3942 - 70 and Note 15, “Run-off Lines” in the Notes to the Consolidated Financial Statements.72

The tables below present a development of loss and loss adjustment expense reserve liabilities and payments for the years 19992000 through 2009.2010. The information presented in Table I is net of the effects of reinsurance. The information presented in Table II includes only amounts related to direct and assumed insurance. The amounts in the tables for the yearsyear ended December 31, 1999 to 2000 do not include Colony’s and Rockwood’s unpaid losses and loss adjustment expenses since these entities were acquired in 2001. Amounts for the former PXRE companies are not included for the years prior to 2007, the year of acquisition. Additionally, amounts for Argo International are not included for the years prior to 2008, the year of acquisition.

Index to Financial Statements

Table I

Analysis of Losses and Loss Adjustment Expense (“LAE”) Development

(Net of Reinsurance)

(5)

The Cumulative (Deficiency) Redundancy for each of the current year and prior year lines includes $176.2 million of (Deficiency) related to the commutation of the Adverse Development Contract (“ADC”) for each of the 2002 through 2004 years. There is no net effect to the change in Cumulative (Deficiency) Redundancy.

Index to Financial Statements

Table II

Analysis of Losses and Loss Adjustment Expense (“LAE”) Development

(Gross Reserves)

Excluded from the preceding tables are loss reserves of $135.7 million, which arewere classified as “Liabilities held for sale” as of December 31, 2007.

On September 15, 2005, the CompanyArgo Group commuted the ADC which originally became effective in 2002. Reserves previously ceded under the contract of $176.2 million are added back to the Reserves Re-estimated section of the Analysis of Losses and Loss Adjustment Expense Development Net of Reinsurance table for the 2002 through 2004 years and is included in the 2005 Reserves for Losses and LAE line. As a result, the Cumulative (Deficiency) Redundancy line and the Prior Year Cumulative (Deficiency) Redundancy line include a $176.2 million deficiency related to the commutation for each of the 2002 through 2004 years. Retention of loss reserves previously ceded under the ADC did not result in additional loss expense to the Company.expense.

Caution should be exercised in evaluating the information shown in the above tables. It should be noted that each amount includes the effects of all changes in amounts for prior periods. In addition, the tables present calendar year data, not accident or policy year development data, that some readers may be more accustomed to analyzing. The social, economic and legal conditions and other trends which have had an impact on the changes in the estimated liability in the past are not necessarily indicative of the future. Accordingly, readers are cautioned against extrapolating any conclusions about future results from the information presented in these tables.

Index to Financial Statements

Additional information relating to our loss reserve development is included under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on Pages 3942 – 7072 and Note 6, “Reserves for Losses and Loss Adjustment Expenses” in the Notes to Consolidated Financial Statements.

Investments

Insurance companyInvestment Strategy and Guidelines

We follow a conservative investment strategy designed to emphasize the preservation of our invested assets and provide adequate liquidity for the prompt payment of our obligations, including claims payments. To ensure adequate liquidity for payment of claims, we take into account the maturity and duration of our investment portfolio and our general liability profile. To meet our liquidity needs, our fixed income portfolio consists primarily of investment grade, fixed-maturity securities. As of December 31, 2010, these securities, along with cash, represented 78.5% of our total investments must comply with applicable regulatory and domicile constraints which generally prescribecash.

In an effort to meet business needs and mitigate risks, our investment guidelines provide restrictions on our portfolio’s composition, including limits on the type of issuer, sector limits, credit quality and concentrations of investments. These regulations permit, andlimits, portfolio duration, limits on the Company holds, a diversified portfolioamount of investments in high quality corporate bonds, U.S. Treasury notes, securities issued and/or guaranteed by government or government agencies, structured securities, including assetapproved countries and mortgage backed, state and municipal bonds and preferred and common stocks. The majoritypermissible security types. We may direct our investment managers to invest some of the Company’s invested assetsinvestment portfolio in currencies other than the U.S. dollar based on the business we have written, the currency in which our loss reserves are held by its insurance and reinsurance companies and on behalfdenominated, or regulatory requirements.

The performance of the syndicate. These securities are classified as available for sale and are recorded at fair value. Management of the available for saleour investment portfolio is donesubject to a variety of risks, including risks related to general economic conditions, market volatility, interest rate fluctuations, liquidity risk and credit and default risk. Investment guideline restrictions have been established in an effort to minimize the effect of these risks but may not always be effective due to factors beyond our control. A significant rise in interest rates could result in losses, realized or unrealized, in the value of our investment portfolio. Additionally, with considerationrespect to some of changesour investments, we are subject to prepayment and possibly reinvestment risk. Certain investments in market conditions, changes in tax circumstances,our Capital Appreciation Portfolio, which includes high yield fixed income securities, equities, and other alternative investments are subject to maintain an appropriate matchingrestrictions on sale, transfer and redemption, which may limit our ability to withdraw funds or realize gains on such investments for some period of assettime after our initial investment. The values of, and liability duration, among other factors.returns on, such investments may also be more volatile.

Investment Committee and Investment Managers

The Company’s investment policy is approved by theInvestment Committee of our Board of Directors has approved an investment policy statement that contains investment guidelines and itssupervises our investment activity. The Investment Committee who regularly monitormonitors our overall investment results, and compliance with investment objectives and guidelines. Theguidelines, and ultimately reports our overall investment policy specifies minimum levels of overall credit quality as well as maximum levels of issuer and sector concentration in order to achieve an appropriate level of diversification. The policy also provides guidelines on overall duration for the fixed income portfolio and for the equity portfolio, maximum levels of issuer concentrations based on the market capitalization of the issuer. At December 31, 2009, the fixed income securities had an average credit quality of AA+, duration of 3.0 years, and approximately 99.5% were rated as investment grade.

The Company’s investment strategy is to preserve principal and maximize net investment income while generating competitive after-tax total rates of return subject to appropriate levels of risk. The Company manages the duration of the fixed income portfolio relativeresults to the aggregate durationBoard of its insurance and reinsurance liabilities. Although the Company generally intends to hold fixed income securities to maturity, it may re-evaluate its position based upon market conditions and the underlying fundamentals of securities.Directors.

The Company primarily utilizes fourWe currently utilize ten professional fixed incomeinvestment managers to manage the fixed income portfolios. The majority of the equity portfolio is managed through an external investment manager, Fayez Sarofim & Co (see “Related Party Transactions” on page 55.)our portfolio. Certain short-term investments and other strategic investments are managed internally.

Additional information relating to the Company’sour investment portfolio is included under Item 7 “Management’s Discussion7A “Quantitative and Analysis of Financial Condition and Results of Operations”Qualitative Disclosures about Market Risk” on pages 39 - 7072-74 and Note 3,2, “Investments” in the Notes to Consolidated Financial Statements.

Employees

As of December 31, 2009, the Company2010, Argo Group had 1,3311,274 employees. The Company providesWe provide a comprehensive benefits program for substantially all of its employees, including a 401(k) savings plan, health, life and disability benefits and a tuition reimbursement program. Management believes that the Company’s relationshipour relationships with itsour employees isare good.

A number of the Company’sArgo Group’s Bermuda based employees, including the Chief Executive Officer of the Company, are employed pursuant to work permits granted by Bermuda authorities. These permits expire at various times over the next few years. The Bermuda government has a policy that limits the duration of work permits to six years, subject to certain exemptions for key employees.

Index to Financial Statements

Available Information

The Company’sArgo Group’s executive offices are located at 110 Pitts Bay Road, Pembroke HM08, Bermuda. The Company’s mailing address is P.O. Box HM 1282, Hamilton HM FX, Bermuda. ItsThe telephone number is (441) 296-5858. The Company’s website address is www.argolimited.com. The Company filesWe file annual, quarterly and current reports, proxy statements and other information and documents with the SEC,Securities and Exchange Commission (“SEC”), which are made available to read and copy at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by contacting the SEC at 1-800-SEC-0330. Reports filed with the SEC are also made available at www.sec.gov. The Company makesWe make available free of charge on itsour website itsour annual report on Form 10-K, quarterly reports on Form 10-Q, interactive data files, current reports on Form 8-K and amendments to those reports filed with or furnished to the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practical after itwe electronically filesfile them with or furnishesfurnish them to the SEC.

An investment in the Company’sour common shares involves various risks, including those mentioned below and those that are discussed from time to time in our other periodic filings with the SEC. Investors should carefully consider these risks, along with the other information filed in this report, before making an investment decision regarding our common shares. There may be additional risks which the Company iswe are currently unaware of or which we currently consider immaterial. All of these risks could have a material adverse effect on our financial condition, results of operations and/or value of our common shares.

Risks Related to the Business of Insurance and Reinsurance

The insurance and reinsurance business is historically cyclical, and Argo Group may experience periods with excess underwriting capacity and unfavorable premium rates; conversely, Argo Group may have a shortage of underwriting capacity when premium rates are strong both of which could adversely impact Argo Group’s results.

Historically, insurers and reinsurers have experienced significant fluctuations in operating results due to competition, frequency and severity of catastrophic events, levels of capacity, adverse trends in litigation, regulatory constraints, general economic conditions and other factors. The supply of insurance and reinsurance is related to prevailing prices, the level of insured losses and the level of capital available to the industry capital that, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance and reinsurance industry. As a result, the insurance and reinsurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity increased premium levels. Demand for reinsurance depends on numerous factors, including the frequency and severity of catastrophic events, levels of capacity, general economic conditions and underwriting results of primary insurers. The supply of reinsurance is related to prevailing prices, recent loss experience and capital levels. All of these factors fluctuate and may contribute to price declines generally in the reinsurance industry.

Argo Group cannot predict whether market conditions will improve, remain constant or continue to deteriorate. Negative market conditions may impair our ability to underwrite insurance and reinsurance at rates that Argo Group considerswe consider appropriate and commensurate relative to the risk assumed. If Argo Groupwe cannot underwrite insurance or reinsurance at appropriate rates, itsour ability to transact business would be materially and adversely affected. Any of these factors could lead to an adverse effect on Argo Group’sour business, results of operations and/or financial condition.

We operate in a highly competitive environment and no assurance can be given that we will be able to compete effectively in this environment.

We compete with numerous companies that provide property-basedproperty and casualty lines of insurance and reinsurance. Although we employ an experienced management team, have a strong capital position, and have a financial strength rating of “A” rating from A.M. Best and an “A-” for our U.S. insurance subsidiaries from S&P, no assurance can be given that we will be able to compete successfully in the insurance and/or reinsurance market. Increased competition in these markets could result in a change in the supply and/or demand for insurance or reinsurance, our ability to price our products at attractive rates and retain existing business, or write new business on favorable terms. If this increased competition so limits our ability to transact business, our operating results could be adversely affected.

Index to Financial Statements

Argo Group’s insurance and reinsurance subsidiaries have exposure to unpredictable and unexpected industry practices,changes in the claims environment, catastrophes, and terrorist acts that can materially and adversely affect its business, results of operations and/or financial condition.

Emerging Claims. Changes in industry practices and legal, judicial, social and other environmental conditions may have an unexpectedunforeseeable adverse impact on claims and coverage issues. These issues may adversely affect Argo Group’sour business such as extending coverage beyond itsour underwriting intent or increasing the number or size of expected claims. In some instances, these changes may not become apparent until some timesometime after insurance or reinsurance contracts that are affected were issued. As a result, the full extent of liability under Argo Group’sour insurance or reinsurance contracts may not be known for many years after contracts are issued, and the Company’sour financial position and results of operations may be materially and adversely affected in such future periods. The effects of these and other unforeseen emerging claims and coverage issues are inherently difficult to predict.

Catastrophic Losses. Argo Group isWe are subject to claims arising out of catastrophes that may have a significant effect on itsour business, results of operations, and/or financial condition. Catastrophes can be caused by various events, including tornadoes, hurricanes, windstorms, earthquakes, hailstorms, explosions, power outages, severe winter weather, fires and intentional man-made events, such as terrorist attacks.events. The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Insurance companies are not permitted to reserve for catastrophes until such event takes place. Therefore, although Argo Groupwe will actively manage itsour exposure to catastrophes through its underwriting processprocesses and the purchase of reinsurance protection, an especially severe catastrophe or series of catastrophes could exceed itsour reinsurance protection and may have a material adverse impact on Argo Group’sour business, results of operations and/or financial condition. Also, it is possible that a series of catastrophic events could occur with unusual frequency in a given period which, although individually not severe enough to reach the attachment point of reinsurance protection, in the aggregate could have a material adverse impact on the Company.Argo Group.

Further, as a reinsurer of property catastrophe-type coverage in the worldwide marketplace, Argo Re’s operating results in any given period will depend to some extent on the number and magnitude of such natural and man-made catastrophes. While Argo Re may, depending on market conditions, purchase catastrophe retrocessional coverage for its own protection, the occurrence of one or more major catastrophes in any given period could nevertheless have a material adverse impact on Argo Re’s operating results and/or financial condition. This could, in turn, result in a material adverse impact on Argo Group’s business, results of operations and/or financial condition.

Terrorism. Argo GroupWe may also have exposure to losses resulting from acts of terrorism. Even if reinsurers are able to exclude coverage for terrorist acts or price that coverage at rates that Argo Group considerswe consider unattractive, direct insurers, like Argo Group’sour primary insurance company subsidiaries, might not be able to likewise exclude terrorist acts because of regulatory constraints. If this does occur, Argo Group, in its capacity as a primary insurer, would have a significant gap in its reinsurance protection and would be exposed to potential losses as a result of any terrorist acts. These events are inherently unpredictable. It is difficult to predict occurrence of such events with statistical certainty or to estimate the amount of loss per occurrence they will generate. If there is a future terrorist attack, the possibility remains that losses resulting from such event could prove to be material to our financial condition and results of operations. Terrorist acts may also cause multiple claims, and there is no assurance that our attempts to limit our liability through contractual policy provisions will be effective.

The Terrorism Risk Insurance Program Reauthorization Act of 2007 was signed into law by the U.S. President on December 26, 2007. This law renews the prior federal terrorism risk insurance program through December 31, 2014. The program includes protections for acts of domestic terrorism. The insurer deductible is fixed at 20% of an insurer’s direct earned premium, and the federal share of compensation is fixed at 85% of insured losses that exceed insurer deductibles.deductibles, subject to a $100 billion cap. The U.S. Treasury Department is required to promulgate regulations to determine the pro-rata share of insured losses if they exceed the $100 billion cap. In addition, clear and conspicuous notice to policyholders of the $100 billion cap is required. Under the program reauthorization, the trigger at which federal compensation becomes available remains fixed at $100 million per year through 2014.

Index to Financial Statements

Global climate change may have an adverse effect on our financial results.

Although uncertainty remains as to the nature and effect of greenhouse gas emissions, we could suffer losses if global climate change results in an increase in the frequency and severity of natural disasters. As with traditional natural disasters, claims arising from these incidents could increase our exposure to losses and have a material adverse impact on Argo Group’sour business, results of operations, and/or financial condition.

Because our business is dependent upon insurance and reinsurance agents and brokers, we are exposed to certain risks arising out of distribution channels that could cause our results to be averselyadversely affected.

Argo Group marketsWe market and distributesdistribute some of our insurance products through a select group of wholesale agents who have limited quoting and binding authority and who, in turn, sell our insurance products to insureds through retail insurance brokers. These agencies can bind certain risks that meet our pre-established guidelines without our initial approval. If these agents failed to comply with our underwriting guidelines and the terms of their appointment, we could be bound on a particular risk or number of risks that were not anticipated when we developed the insurance products. Such actions could adversely affect our results of operations. Additionally, in any given period we may derive a significant portion of our business from a limited number of agents and brokers and the loss of any of these relationships could have a significant impact on our ability to market our products and services.

In accordance with industry practice, we may pay amounts owed on claims under our insurance and reinsurance contracts to brokers and/or third party administrators who in turn remit these amounts to our insureds or reinsureds. Although the law is unsettled and depends upon the facts and circumstances of each particular case, in some jurisdictions, if an agent or broker fails to remit funds delivered for the payment of claims, we may remain liable to our insured or reinsured ceding insurer for the deficiency. Likewise, in certain jurisdictions, when the insured or reinsured pays the remitting funds to our agent or broker in full, our premiums are considered to have been paid in full, notwithstanding that we may or may not have actually received the premiums from the agent or broker. Consequently, we assume a degree of credit risk associated with certain agents and brokers with whom we transact business.

Argo Group may incur income statement charges (or benefits) if the reserves for losses and loss adjustment expenses are insufficient (or redundant). Such income statement charges (or benefits) could be material, individually or in the aggregate, to the Company’sour financial condition and operating results in future periods andsome of which could result in rating agency actions and/or the need to raise capital.

General Loss Reserves. Argo Group maintainsWe maintain reserves for losses and loss adjustment expenses to cover estimated ultimate unpaid liabilities with respect to reported and unreported claims incurred as of the end of each balance sheet date. Reserves do not represent an exact calculation of liability, but instead represent management’s best estimates, which take into account various statistical and actuarial projection techniques as well as other influencing factors. These reserve estimates represent management’s expectations of what the ultimate settlement and administration of claims will cost based on an assessment of facts and circumstances then known, review of historical settlement patterns, estimates of trends in claims severity and frequency, changing legal theories of liability and other factors. Variables in the reserve estimation process can be affected by both internal and external events, such as changes in claims handling procedures, economic inflation, legal trendsprecedent and legislative changes. Many of these items are not directly quantifiable, particularly on a prospective basis. Additionally, there may be significant reporting lags between the occurrence of an insured event and the time it is actually reported to the insurer, which can be of particular concern in two ofto our markets, reinsurance and excess.excess lines business segments. Reserve estimates are continually refinedreevaluated in a regular ongoing process as historical loss experience develops and additional claims are reported and settled, and as a consequence, management’s estimates may change from time to time. Because establishmentthe calculation and setting of the reserves for losses and loss adjustment expenses is an inherently uncertain process involvingdependent on estimates, currently establishedour existing reserves may be insufficient (or redundant) orand estimates of ultimate losses and loss adjustment expenses may increase (or decrease). over time.

Index to Financial Statements

Asbestos and Environmental Liability Loss Reserves. The Company hasWe have received asbestos and environmental liability claims arising out of other liability coverage primarily written in the 1960s, 1970s and into the mid-1980s. Argo Group hasWe have a specialized claims unit that investigates and adjusts asbestos and environmental claims. Beginning in 1986, nearly all standard liability policies contained an express exclusion for asbestos and environmental related claims. All policies currently being issued by Argo Group’sour insurance subsidiaries contain this exclusion. In addition to the previously described general uncertainties encountered in estimating reserves, there are significant additional uncertainties in estimating the amount of Argo Group’sour potential losses from asbestos and environmental claims. Reserves for asbestos and environmental claims cannot be estimated with traditional loss reserving techniques that rely on historical accident year development factors due to the uncertainties surrounding these types of claims. Among the uncertainties impacting the estimation of such losses are:

Argo Group’s managementManagement believes that these factors continue to render traditional actuarial methods less effective at estimating reserves for asbestos and environmental losses than reserves on other types of losses. Argo Group establishesWe establish reserves to the extent that, in the judgment of itsour management, the facts and prevailing law reflect an exposure for Argo Groupus not dissimilar to those results the industry has experienced with regard to asbestos and environmental related claims. The Company hasWe have annually reviewed itsour loss and loss adjustment expense reserves for itsour run-off lines of business, including its asbestos and environmental claims. The review entails a detailed analysis of itsour direct and assumed exposure. Argo GroupWe will continue to monitor industry trends and itsour own experience in order to determine the adequacy of itsour environmental and asbestos reserves.

Black Lung Disease Loss Reserves. Through Argo Group’sour subsidiary Rockwood, Argo Group haswe have exposure to claims for black lung disease. Those diagnosed with black lung disease are eligible to receive workers compensation benefits from various US federal and state programs. These programs are continually being reviewed by the governing bodies and may be revised without notice in such a way as to increase the level of Argo Group’sour exposure. Argo Group’s subsidiary, Colony, also currently underwrites environmental and pollution coverages (on a limited number of policies) for underground storage tanks.

Because of all of the above, estimates of ultimate losses and loss adjustment expenses may increase in the future. Income statement charges that would result from such increases, if any, cannot now be reasonably estimated. Such charges could be material, individually or in the aggregate, to Argo Group’sour future operating results and financial condition and could result in rating agency actions and/or the need to raise capital. The CompanyWe can provide no assurances such capital will be available. Adjustments to reserves are reflected in the results of the periods in which themanagement’s best estimates are changed.

Additional information relating to the Company’sour reserves for losses and loss adjustment expense is included under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 3942 - 7072 and Note 6 “Reserves for Losses and Loss Adjustment Expenses” in the Notes to Consolidated Financial Statements.

Argo Re’s inability to provide the necessary collateral could affect Argo Re’s ability to offer reinsurance in certain markets.

Argo Re is not licensed or admitted as an insurer in any jurisdiction other than Bermuda. Because many jurisdictions do not permit insurance companies to take credit for reinsurance obtained from unlicensed or non-admitted insurers in statutory financial statements unless appropriate security is in place, Argo Re anticipates that its reinsurance clients will typically require it to post a letter of credit or other collateral. If Argo Re is unable to arrange for security on commercially reasonable terms, Argo Re could be limited in its ability to underwrite business for certain of its clients.

Index to Financial Statements

Argo Group faces a risk of non-availability of reinsurance, which could materially and adversely affect its business, results of operations and/or financial condition.

As is common practice within the insurance industry, Argo Group transferswe transfer a portion of the risks insured under itsour policies to other companies through the purchase of reinsurance. This reinsurance is maintained to protect the insurance and reinsurance subsidiaries against the severity of losses on individual claims, unusually serious occurrences in which a number of claims produce an aggregate extraordinary loss and catastrophic events. Although reinsurance does not discharge Argo Group’sour subsidiaries from their primary obligation to pay for losses insured under the policies they issue, reinsurance does make the assuming reinsurer liable to the insurance and reinsurance subsidiaries for the reinsured portion of the risk. A credit exposure exists with respect to ceded losses to the extent that any reinsurer is unable or unwilling to meet the obligations assumed under the reinsurance contracts. The collectability of reinsurance is subject to the solvency of the reinsurers, interpretation and application of contract language and other factors. Argo Group isWe are selective in regard to itsour reinsurers, placing reinsurance with those reinsurers with strong financial strength ratings from A.M. Best, S&P, or a combination thereof, although the financial condition of a reinsurer may change based on market conditions. Argo Group performsWe perform credit reviews on itsour reinsurers, focusing on, among other things, financial condition, stability, trends and commitment to the reinsurance business. Argo GroupWe also requiresrequire assets in trust, letters of credit or other acceptable collateral to support balances due from reinsurers not authorized to transact business in the applicable jurisdictions. It has not always been standard business practice to require security for balances due; therefore, certain balances are not collateralized. A reinsurer’s insolvency or inability to make payments under the terms of a reinsurance contract could have a material adverse effect on Argo Group’sour business, results of operations and/or financial condition.

There can be no assurance that the CompanyArgo Group and its subsidiaries will not experience a ratings downgrade, which may result in an adverse effect on Argo Group’sour business, financial condition and operating results.

Ratings with respect to claims paying ability and financial strength are important factors in establishing the competitive position of insurance companies and will also impact the cost and availability of capital to an insurance company. Ratings by A.M. Best and S&P represent an important consideration in maintaining customer confidence in Argo Groupus and in itsour ability to market insurance products. Rating organizations regularly analyze the financial performance and condition of insurers.

All of Argo Group’sour insurance and reinsurance subsidiaries have a Financial Strength Rating of “A“A” (Excellent)” (3rd highest rating out of 16 rating classifications) with a stable outlook from A.M Best.Best (with the exception of ARIS Title Insurance Corporation, which has yet to be rated). S&P has assigned a Financial Strength Rating of “A-” (Strong)” to Argo Group’sour U.S. insurance subsidiaries.subsidiaries (other than ARIS Title Insurance Corporation). Argo Group US has an Issuer Credit Rating of “BBB-” (Good)” with a stable outlook from S&P.

Argo Group’sOur ratings are subject to periodic review by those entitiesthese agencies and the continuation of those ratings cannot be assured. A significant downgrade in these ratings could affect Argo Group’sour competitive position in the insurance industry, make it more difficult for Argo Groupus to market itsour products, and result in a material loss of business as policyholders move to other companies with higher claims-paying and financial strength ratings.ratings, and require us to raise additional capital.

Risks Related to Regulatory Constraints

Regulatory constraints may restrict Argo Group’sour ability to operate itsour business.

General Regulatory Constraints

Restrictions on Ownership. Argo Group’s ownership of U.S. subsidiaries can, under applicable state insurance company laws and regulations, delay or impede a change of control of Argo Group. Under applicable insurance regulations, any proposed purchase of 10% or more of theArgo Group’s voting securities of Argo Group would require the prior approval of the relevant insurance regulatory authorities.

Except as provided below, shareholders have one vote for each common share held by them and are entitled to vote at all meetings of shareholders. However, for so long as the shares of a shareholder are treated as “controlled shares” (as determined under section 958 of the Internal Revenue Code) of any U.S. Person (that owns shares directly or indirectly through non-U.S. entities) and such controlled shares constitute 9.5% or more of the votes conferred by Argo Group’sour issued shares, the voting rights with respect to the controlled shares of such U.S. Person, which we refer to as a 9.5% U.S. Shareholder, will be limited, in the aggregate, to a voting power of less than 9.5% under a formula specified in Argo Group’s bye-laws. The formula is applied repeatedly until the voting power of all 9.5% U.S. Shareholders has been reduced to less than 9.5%. In addition, the board of Argo Group Board may limit a shareholder’s voting rights where it deems it appropriate to do so to (i) avoid the existence of any 9.5% U.S. Shareholder; and (ii) avoid certain material adverse tax, legal or regulatory consequences to Argo Group, any subsidiary of Argo Group or any direct or indirect shareholder or its affiliates. “Controlled shares” include, among other things, all shares of Argo Group that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code).

Index to Financial Statements

Under these provisions, certain shareholders may have their voting rights limited, while other shareholders may have voting rights in excess of one vote per share. Moreover, these provisions could have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct share ownership.

Regulation of Subsidiaries

General. Argo Group’sOur insurance and reinsurance subsidiaries and insurance-related services subsidiaries may not be able to obtain or maintain necessary licenses, permits, authorizations or may be able to do so only at significant cost. In addition, Argo Groupwe may not be able to comply with, or obtain appropriate exemptions from, the wide variety of laws and regulations applicable to insurance or reinsurance companies or insurance-related services companies or holding companies. Failure to comply with or to obtain appropriate authorizations and/or exemptions under any applicable laws could result in restrictions on Argo Group’sour ability to do business or certain activities that are regulated in one or more of the jurisdictions and could subject Argo Groupus to fines and other sanctions, which could have a material adverse effect on Argo Group’sour business.

Argo Group’s U.S. Subsidiaries. Argo Group’sOur U.S. insurance subsidiaries are subject to extensive regulation which may reduce our profitability or inhibit our growth. If we fail to comply with these regulations, we may be subject to penalties, including fines and suspensions, which may adversely affect our financial condition and results of operations. Finally, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could adversely affect our ability to pursue our business plan and operate our business.U.S. insurance subsidiaries.

The U.S. insurance industry is highly regulated and supervised. Our insurance subsidiaries are subject to the supervision and regulation of each of the states in which they are domiciled and the states in which they do business. Such supervision and regulation is designed to protect our policyholders rather than our shareholders. These regulations are generally administered by a department of insurance in each state and relate to various aspects of our business. State insurance departments also conduct periodic examinations of the affairs of insurance and reinsurance companies and require the filing of annual and other reports relating to financial condition, holding company issues and other matters. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives.

In addition, regulatory authorities have relatively broad discretion to deny, suspend or revoke licenses for various reasons, including the violation of regulations. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us. This could adversely affect our ability to operate our business.

From time to time, various regulatory and legislative changes have been proposed in the U.S. insurance industry, some of which could have an effect on reinsurers and insurers. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers, an initiative to create a federally guaranteed disaster reinsurance pool pre-funded by insurers and proposals in various state legislatures (some of which have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the National Association of Insurance Commissioners. Also currently being considered is a bill to improve and streamline the regulation of non-admitted insurance and reinsurance. The Company isWe are unable to predict what effect, if any, the foregoing developments may have on itsour operations and financial condition in the future.

Argo Group’s Bermuda Subsidiary. Argo Re is registered as a Class 4 Bermuda insurance company and is subject to regulation and supervision in Bermuda.Bermuda by the Bermuda Monetary Authority. Changes in Bermuda insurance statutes, regulations and the policies of the BMA could result in restrictions on Argo Re’s ability to pursue its business plans, issue reinsurance policies, distribute funds and execute its investment strategy.

Index to Financial Statements

U.K. Financial Services Authority (“FSA”) Regulations. Argo International (formerly known as Heritage Underwriting Agency plc) operations areis regulated by the FSA and franchised by Lloyd’s. The FSA has substantial powers of intervention in relation to the Lloyd’s managing agents (such as Argo International)Underwriting Agency) which it regulates, including the power to remove their authorization to manage Lloyd’s syndicates. In addition, each year the FSA requires Lloyd’s to satisfy an annual solvency test that measures whether Lloyd’s has sufficient assets in the aggregate to meet all outstanding liabilities of its members, both current and run-off. If Lloyd’s fails this test, the FSA may require Lloyd’s to cease trading and/or its members to cease or reduce underwriting. Future regulatory changes or rulings by the FSA could interfere with Argo International’s business strategy or financial assumptions, possibly resulting in an adverse effect on Argo International’s financial condition and operating results.

Lloyd’s of London Regulations and Requirements. Argo International’s operations are franchised by Lloyd’s. The Lloyd’s Franchise Board requires annual approval of Argo International’s business plan, including maximum underwriting capacity, and may require changes to any business plan presented to it or additional capital to be provided to support underwriting. Lloyd’s also imposes various charges and assessments on its member companies. If Lloyd’s requiredwere to require material changes in Argo International’s business plans, or if charges and assessments payable by Argo International to Lloyd’s were to increase significantly, these events could have an adverse effect on the operations and financial results of Argo International. In addition, no assurances can be given as to how much business Lloyd’s will permit Argo International to underwrite in 20102011 and subsequent years nor as to the viability and cost of the capital structure we may use as a substitute for the external capital and reinsurance used by Argo International in 20092010 and prior underwriting years.

The financial security of the Lloyd’s market is regularly assessed by three independent rating agencies (A.M. Best, Standard & Poor’s,S&P, Fitch Ratings). A satisfactory credit rating issued by an accredited rating agency is necessary for Lloyd’s syndicates to be able to trade in certain classes of business at current levels. Argo International would be adversely affected if Lloyd’s current ratings were downgraded.

Other Applicable Laws. Lloyd’s worldwide insurance and reinsurance business is subject to various regulations, laws, treaties and other applicable policies of the European Union, as well as each nation, state and locality in which it operates. Material changes in governmental requirements and laws could have an adverse affect on Lloyd’s and its member companies, including Argo International.

Argo Group is a holding company and if its subsidiaries do not make dividend payments to Argo Group, Argo Group may not be able to pay dividends or other obligations.

Argo Group is a holding company with no significant operations or significant assets other than the share capital of itsour subsidiaries. Argo Group reliesWe rely primarily on cash dividends from itsour subsidiaries to pay itsour operating expenses and obligations. Argo Group expectsWe expect future distributions from these subsidiaries to be itsour principal source of funds to meet our financial obligations and pay expenses andshareholder dividends. The payment of dividends by Argo Group’sour insurance and reinsurance subsidiaries is limited under Bermuda law, Irish law and under the Illinois, Virginia, Pennsylvania, Ohio and LouisianaNew York insurance laws, which are the states of domicile for Argonaut Insurance Company, Colony Insurance Company, ARIS Title Insurance Corporation and Rockwood Casualty Insurance Company, Argo Group US’s directly owned insurance subsidiaries. These states regulate the maximum amount of annual dividends or other distributions available to shareholders without prior approval of the state regulatory authorities.

Bermuda insurance laws require Argo Re to maintain certain measures of solvency and liquidity, and further limit the amount by which we can reduce surplus without prior regulatory approval.

Risks Related to Our Business Operations

Argo Group may be unable to attract and retain qualified employees and key executives.

We depend on our ability to attract and retain experienced underwriting talent and other skilled employees and key executives who are knowledgeable about our business. If the quality of our underwriting team and other personnel decreases, we may be unable to maintain our current competitive position in the specialized markets in which we operate and be unable to expand our operations into new markets, which could adversely affect our results.

Index to Financial Statements

Argo Group is domiciledand certain of its subsidiaries have operations which require employees to live and/or work in Bermuda. Under Bermuda law, non-Bermudians, with some limited exceptions, may not engage in any occupation in Bermuda without an appropriate governmental work permit. The Bermuda government will issue a work permit for a specific period of time, which may be extended upon showing that, after proper public advertisements, no Bermudian (or spouse of a Bermudian or holder of a permanent resident certificate) is available who meets the minimum standards for the advertised position. The Bermuda government has a policy that limits the duration of these work permits to six years, subject to certain exemptions for key employees. A substantial number of Argo Group’sour Bermuda based employees are employed pursuant to these work permits granted by Bermuda authorities. If the Bermuda government refuses to extend the work permits of our key Argo Group employees, our operations could be disrupted and our financial performance could be adversely affected.

Litigation and legal proceedings against Argo Group could have an adverse effect on Argo Group’s financial condition.

Between May 3, 2006 and June 16, 2006, several class action lawsuits were filed against PXRE Group Ltd. (now Argo Group) and certain former officers of PXRE on behalf of a putative class of plaintiffs consisting of investors who purchased PXRE securities traded on the NYSE under the ticker symbol “PXT” between September 11, 2005 and February 22, 2006. These lawsuits were consolidated into one proceeding before the United States District Court for the Southern District of New York and were the subject of an Amended Class Action Complaint filed on June 15, 2007 (the “Amended Complaint”). The Amended Complaint alleges that during the purported class period PXRE fraudulently understated the full impact of hurricanes Katrina, Rita and Wilma on PXRE’s business and that certain PXRE executives made a series of materially false and misleading statements or omissions about PXRE’s business, prospects and operations in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), and Rule 10b-5 promulgated under the 1934 Act. On March 4, 2009, the Amended Complaint was dismissed with prejudice by the District Court. On December 21, 2009 the District Court’s decision was affirmed on appeal to the United States Court of Appeals for the Second Circuit, and the class plaintiff’s petition for rehearing was denied by the Court of Appeals on January 11, 2010.

On December 4, 2008, a lawsuit was filed against PXRE.,PXRE Group Ltd. (now Argo GroupGroup) and certain of PXRE’s former officers in United States District Court for the Southern District of New York alleging causes of action based on facts and circumstances on behalf of a group of institutional shareholders that purchased Series D Perpetual Non-voting Preferred Shares of PXRE pursuant to the Private Placement Memorandum dated on or about September 28, 2005 (the “Private Placement”). The lawsuit alleges that the Private Placement was a public offering and that the Private Placement Memorandum contained false and misleading statements or omissions concerning PXRE’s business, prospects and operations actionable under Section 12(a) (2) of the Securities Act of 1933. In addition, the lawsuit alleges claims under New York state law for negligent misrepresentation and common law fraud based upon, among other things, statements contained in the Private Placement Memorandum and alleged false and misleading statements by PXRE’s named former officers. The facts and circumstances of the Private Placement litigation arise generally out of statements or omissions relating to the impact of hurricanes Katrina, Rita and Wilma on PXRE. On April 6, 2009, the institutional investors filed an amended complaint. The CompanyArgo Group filed a motion to dismiss the amended complaint on May 6, 2009. On January 26, 2010 the District Court granted the Company’sour motion, dismissing the plaintiffs’ federal law causes of action without prejudice, and holding that the amended complaint failed to allege facts that would show that the Private Placement could be construed to be a public offering or that the Private Placement should be integrated with PXRE’s public share offering. The Court’s order provided the plaintiffs with a deadline of February 22, 2010 to file amended pleadings setting forth the nature of the entities to which the Private Placement was offered. Based on the dismissal of the federal law claims, the Court’s order also dismissed without prejudice all state law claims asserted by the plaintiffs for lack of subject matter jurisdiction, without prejudice to the plaintiffs’ right to file a separate action in state court asserting such claims. On February 22, 2010 the plaintiffs filed a Second Amended Complaint in the District Court case seeking to overcome the deficiencies outlined in the order of dismissal. At a pre-motion conference held on April 14, 2010, the Court indicated that the Second Amended Complaint was also insufficient to raise an issue of fact as to the federal law causes of action. The Company doesCourt allowed plaintiffs a third opportunity to replead, and plaintiffs filed their Third Amended Complaint on April 23, 2010. We do not believe that the SecondThird Amended Complaint is sufficient to comply with the relevant legal standard, and plans to fileon May 14, 2010 we filed a Motion to Dismiss accordingly.

Although the Company has received no notice of any other potential lawsuits or other proceedings relating to the alleged facts and circumstances described above, itPlaintiffs’ Third Amended Complaint, which is possible that the Company could be the subject of additional litigation or regulatory inquiries regarding such matters in the future.set for oral argument on March 16, 2011.

At this stage, the CompanyArgo Group is unable to determine with any reasonable certainty the specific claims, litigants, or alleged damages that ultimately may be associated with the pending securities litigation, Private Placement lawsuit or any other future proceedings regarding the alleged facts and circumstances described above, nor can the Companywe currently predict the timing of any rulings, trials or other significant events relating to such proceedings. Given these limitations and the inherent difficulty of projecting the outcome of litigated disputes, the Company iswe are unable to reasonably estimate the possible loss, range of loss or legal costs that are likely to arise out of the pending securities litigation or any future proceedings relating to the above matters at this time. The CompanyArgo Group has insurance protection that may cover a portion of any potential loss or legal costs, but a settlement above the coverage limits could impact the Company’sour financial position.

Based on all information available to the CompanyArgo Group at this time, management of the Company believes that PXRE’s reserving practices, financial disclosures, public filings and securities offerings in the aftermath of the 2005 hurricanes complied fully with all applicable regulatory and legal requirements. However, if unfavorable outcomes in the class action litigation or Private Placement lawsuit were to occur and result in the payment of substantial damages or fines or criminal penalties, these outcomes could have a material adverse effect on the Company’sour business, cash flows, results of operations, financial position and prospects.

TheArgo Group’s subsidiaries of the Company are parties to other legal actions incidental to their business. Based on the advice of counsel, management of the Company believes that the resolution of these matters will notAdverse outcomes could materially affect the Company’sour financial condition or results of operations.

Index to Financial Statements

Argo Group’s merger and acquisition strategy may not succeed.

Argo Group’s strategy for growth may include merger and acquisition transactions. This strategy presents risks that could have a material adverse effect on Argo Group’s business and financial performance, including: (i) the diversion of management’s attention, (ii) the ability of Argo Group to execute a transaction effectively, including the integration of operations and the retention of employees, and (iii) the contingent and latent risks associated with the past operations of and other unanticipated problems arising from a transaction partner. Argo GroupWe cannot predict whether itwe will be able to identify and complete a future transaction on terms favorable to it. Argo Groupus. We cannot know if itwe will realize the anticipated benefits of a completed transaction or if there will be substantial unanticipated costs associated with thesuch a transaction.

Specifically, we acquired Argo International in May 2008 and there can be no assurance that we will fully realize the expected benefits of this acquisition. The Company hasWe have recorded goodwill and intangible assets related to the acquisition of Argo International based on assumptions of anticipated benefits. These assets may become impaired if anticipated benefits are not achieved, resulting in a corresponding impact on our results of operations and financial condition.

In addition to the Argo International acquisition, a future transaction within the Argo Groupour merger and acquisition strategy may result in tax consequences at either or both the shareholder and Argo Group level, potentially dilutive issuances of our equity securities, the incurrence of additional debt and the recognition of potential impairment of goodwill and other intangible assets. Each of these factors could adversely affect Argo Group’sour financial position and results of operations.

Argo Group’s internal controls may fail and have an adverse effect on our business.

We utilize a number of strategies and processes to mitigate our risk exposure including:

However, there are inherent limitations in all of these strategies. No assurance can be given that an unanticipated event or series of such events will not result in loss levels that could have a material adverse effect on Argo Group’sour financial condition or results of operations.

We continually enhance our operating procedures and internal controls to effectively support our business and comply with our regulatory and financial reporting requirements. As a result of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control objectives have been or will be met, and that instances of fraud, if any, within the company have been detected. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons or by collusion of two or more persons. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in a cost-effective control system, misstatement due to error or fraud may occur and not be detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the disclosure controls and procedures are met; our management does not expect that our disclosure controls or our internal controls will prevent all errors or fraud.

Further, Argo Group’sour business is highly dependent upon the successful and uninterrupted functioning of our computer and data processing systems. We rely on these systems to perform accounting, policy administration, actuarial and other modeling functions necessary for writing business, as well as to process and make claims and other payments. We have a highly trained staff that is committed to the development and maintenance of these systems. The failure of these systems could interrupt our operations. This could result in a material adverse effect on our business results.

Index to Financial Statements

In addition, a security breach of our computer systems could damage our reputation or result in financial liability. We retain confidential information regarding our business dealings in our computer systems. We may be required to spend significant capital and other resources to protect against security breaches or to alleviate problems caused by such breaches. It is critical that these facilities and infrastructure remain secure. Despite the implementation of security measures, this infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. In addition, we could be subject to liability if hackers were able to penetrate our network security or otherwise misappropriate confidential information.

An impairment in the carrying value of goodwill and intangible assets could negatively impact our consolidated results of operations and shareholders’ equity.

Goodwill and intangible assets are originally recorded at fair value. Goodwill is not amortized while certain intangible assets are amortized over estimated useful lives or have indefinite useful lives. Goodwill and intangible assets are reviewed for impairment at least annually or more frequently if indicators are present. Management, in evaluating the recoverability of such assets, relies on estimates and assumptions related to margin, growth rates, discount rates and other data. There are inherent uncertainties related to these factors and management’s judgment in applying these factors. Goodwill and intangible asset impairment charges can result from declines in operating results, divestitures or sustained market capitalization declines and other factors. Impairment charges could materially affect our financial results in the period in which they are recognized. As of December 31, 2009,2010, goodwill and intangible assets represented approximately 15.4%15.3% of shareholders’ equity.

Risks Related to Our Corporate Structure

Some aspects of Argo Group’s corporate structure and applicable insurance regulations may discourage or impede sale of the company,Company, tender offers, or other mechanisms of control.

Restrictions on Stock Transfers. Argo Group’s bye-laws generally permit transfers of Argo Groupour common shares unless the board of directors determines a transfer may result in a non-de minimsminimus adverse tax, legal or regulatory consequence to Argo Group, any Argo Group subsidiary or any direct or indirect shareholder of Argo Group or its affiliates. Argo Group may refuse to register on its share transfer records any transfer that does not comply with these share transfer restrictions. A transferee will be permitted to promptly dispose of any Argo Group shares purchased that violate the restrictions and as to the transfer of which registration is refused.

Restrictions on Voting Rights. In the event that Argo Group becomeswe become aware of a U.S. Person (that owns Argo Group shares directly or indirectly through non-U.S. entities) owning more than the permitted 9.5% level of voting power of the outstanding shares of Argo Group after a transfer of shares has been registered, Argo Group’s bye-laws provide that, subject to certain exceptions and waiver procedures, the voting rights with respect to the shares of Argo Group owned by any such shareholder will be limited to the permitted level of voting power, subject only to the further limitation that no other shareholder allocated any such voting rights may exceed the permitted level of voting power as a result of such limitation.

Argo GroupWe also hashave the authority under itsour bye-laws to request information from any shareholder for the purpose of determining whether a shareholder’s voting rights are to be reallocated under the bye-laws. If a shareholder fails to respond to such a request for information or submits incomplete or inaccurate information in response to such a request, Argo Group may, in its sole discretion, eliminate such shareholder’s voting rights.

Election of Board of Directors. Argo Group’sOur bye-laws provide for a classified board of directors. The directors of the class elected at each annual general meeting hold office for a term of three years, with the term of each class expiring at successive annual general meetings of shareholders. Under Argo Group’sour bye-laws, the vote of two-thirds of the outstanding shares entitled to vote and the approval of a majority of the board are required to amend bye-laws regarding appointment and removal of directors, indemnification of directors and officers, directors’ interests and the procedures for amending bye-laws.

Restrictions on Third Party Takeovers. The provisions described above may have the effect of making more difficult or discouraging unsolicited takeover bids from third parties. To the extent that these effects occur, shareholders could be deprived of opportunities to realize takeover premiums for their shares and the market price of their shares could be depressed. In addition, these provisions could also result in the entrenchment of incumbent management.

Index to Financial Statements

Argo Group is a Bermuda company and it may be difficult for you to enforce judgments against it and/or its directors and executive officers.

Argo Group is organized under the laws of Bermuda and itsour business is based in Bermuda. The Companies Act 1981 of Bermuda, which applies to Argo Group, differs in certain material respects from laws generally applicable to U.S. corporations and their shareholders. These differences include the manner in which directors must disclose transactions in which they have an interest, the rights of shareholders to bring class action and derivative lawsuits, the company’s right to enter into business transactions with shareholders without prior approval from shareholders, committee organization and the scope of indemnification available to directors and officers.

In addition, certain of Argo Group’s directors and officers reside outside the United States, and all or a substantial portion of Argo Group’s assets and the assets of such persons are located in jurisdictions outside the United States. As such, it may be difficult for investors to effect service of process within the United States on our directors and officers who reside outside the United States or to enforce against us or our directors and officers judgments of U.S. courts predicated upon civil liability provisions of the U.S. federal securities laws.

Argo Group has been advised that there is doubt as to whether:

Further, Argo Group has been advised that there is no treaty in effect between the United States and Bermuda providing for the enforcement of judgments of United States courts, and there are grounds upon which Bermuda courts may not enforce judgments of United States courts. Because judgments of United States courts are not automatically enforceable in Bermuda, it may be difficult for Argo Group’s shareholders to recover against Argo Group based on such judgments.

Risks Related to Economic Uncertainties

We may be adversely affected by changes in economic and political conditions, including inflation and changes in interest rates.

The effects of inflation could cause the cost of claims to rise in the future. Our reserve for losses and loss adjustment expenses includes assumptions about future payments for settlement of claims and claims handling expenses, such as medical treatments and litigation costs. To the extent inflation causes these costs to increase above reserves established for these claims, we will be required to increase our loss reserves with a corresponding reduction in our net income in the period in which the deficiency is identified.

Additionally, our operating results are affected, in part, by the performance of our investment portfolio. As discussed in greater detail below, our investment portfolio may be adversely affected by inflation or changes in interest rates.

Interest rates are highly sensitive to many factors, including the fiscal and monetary policies of the U.S. and other major economies, inflation, economic and political conditions and other factors beyond our control. Although we attempt to take measures to manage the risks of investing in changing interest rate environments, we may not be able to mitigate interest rate sensitivity effectively. Despite our mitigation efforts, an increasefluctuation in interest rates could have a material adverse effect on our book value.

Index to Financial Statements

A prolonged recession or a prolonged period of recovery characterized by a highly competitive environment for pricing terms and conditions, including as a resultor period of significant turmoil in the U.S. and international financial markets, could adversely affect our business, liquidity and financial conditions, and our share price.

U.S. and international financial market disruptions such as the ones experienced in the recent global financial crisis, along with the possibility of a prolonged recession, may potentially affect various aspects of our business, including the demand for and claims made under our products, our counterparty credit risk and the ability of our customers, counterparties and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital resources and our investment performance. Volatility in the U.S. and other securities markets may also adversely affect our share price. Depending on future market conditions, we could incur substantial additional realized and unrealized losses in future periods, which would have an adverse impact on our results of operations, financial condition, debt and financial strength ratings, insurance subsidiaries’ capital and ability to access capital markets.

Argo Group’sOur investment portfolio is subject to significant market and credit risks which could result in an adverse impact on Argo Group’sour financial position or results.

Argo Group holdsWe hold a diversified portfolio of investments. These investments are managed in accordance with our investment policy by professional investment management firms and internally, under the direction of our investment committee and the Chief Investment Officer. Although our investment policies stress diversification of risks, conservation of principal, and liquidity, our investments are subject to general economic conditions and market risks as well as risks inherent to particular securities.

During an economic downturn, our investment portfolio could be subject to higher risk. The value of our investment portfolio is subject to the risk that certain investments may default or become impaired due to deterioration in the financial condition of one or more issuers of the securities held in our portfolio, or due to deterioration in the financial condition of an insurer that guarantees an issuer’s payments of such investments. Such defaults and impairments could reduce our net investment income and result in realized investment losses.

Our investment portfolio is also subject to increased valuation uncertainties when investment markets are illiquid. The valuation of investments is more subjective when markets are illiquid, thereby increasing the risk that the estimated fair value (i.e., the carrying amount) of the portion of the investment portfolio that is carried at fair value as reflected in our financial statements is not reflective of prices at which actual transactions would occur.

Additionally, Argo Group’sour portfolio of investments in fixed income and short-term securities may be adversely affected by changes in inflation and/or interest rates which, in turn, may adversely affect operating results. The fair market value and investment income of these assets fluctuate with general economic and market conditions. Generally, the fair market value of fixed income securities decreases as interest rates increase. Some fixed income securities have call or prepayment options, which represent possible reinvestment risk in declining rate environments. Other fixed income securities such as mortgage-backed and asset-backed securities carry prepayment risk.

The Company’s investment portfolio includes $21.9 million, less than 1% of our portfolio, of mortgage-backed securities collateralized by sub prime residential loans. These securities were issued over several years from 2001 through 2006. The Company’s exposure to unrealized losses on securities with sub prime exposure has been predominantly related to changes in the security values. The Company and its investment managers closely monitor the performance of sub prime assets, using statistics provided by data vendors as well as information provided directly by trustee remittance reports. These data reference points include, but are not limited to delinquencies, foreclosures, accumulated loss, and credit support, which are used to determine the potential for losses or marginal risk. The Company has never purchased collateralized debt obligations or mortgage derivatives.

Since the beginning of the recent global financial crisis, delinquencies and losses with respect to residential mortgage loans generally have increased and may continue to increase, particularly in the sub prime sector. In addition, induring recent monthsyears residential property values in many states have declined or remained stable, after extended periods during which those values appreciated. A continued decline or an extended flattening in those values may result in additional increases in delinquencies and losses on residential mortgage loans generally, especially with respect to second homes and investment properties, and with respect to any residential mortgage loans where the aggregate loan amounts (including any subordinate loans) are close to or greater than the related property values. These developments may have a significant adverse effect on the prices of loans and securities, including those in our investment portfolio. The situation continues to have wide ranging consequences, including downward pressure on economic growth and the potential for increased insurance and reinsurance exposures, which could have a material and adverse impact on our results of operations, financial condition, business and operations.

Argo GroupWe also investsinvest in marketable equity securities. These securities are carried on the balance sheet at fair market value and are subject to potential losses and declines in market value. Argo Group’sOur invested assets also include hedge funds, equity limited partnerships, privately held securities, and other privately held securities.alternative investments. These investments were designed to provide diversification of risk and enhance the return on the overall portfolio. However, such investments entail substantial risks.

Index to Financial Statements

Risks for all types of securities are managed through application of the investment policy, which establishes investment parameters that include, – but(but are not limited to –to) maximum percentages of investment in certain types of securities, minimum levels of credit quality, and Option-Adjusted Duration guidelines. No issuer (excluding United States Government and United States Governmental agencies) of fixed income or equity securities represents more than 4.1%3.7% of shareholders’ equity at December 31, 2009.2010.

Although Argo Group seekswe seek to preserve itsour capital, there can be no assurance that Argo Group’sour investment objectives will be achieved, and results may vary substantially over time. In addition, although Argo Group seekswe seek to employ investment strategies that are not correlated with itsour insurance and reinsurance exposures, losses in Argo Group’sour investment portfolio may occur at the same time as underwriting losses and, therefore, exacerbate such losses’ adverse effect on Argo Group.us.

Argo Group may be adversely affected by foreign currency fluctuations.

Although Argo GroupGroup’s foreign subsidiaries’ functional currency is the U.S. Dollar, with the exception of our Brazilian subsidiary whose functional currency is the Brazilian Real, certain premium receivables and loss reserves include business denominated in currencies other than U.S. Dollars. With the acquisition of Argo International, foreign currency exposure has increased. Argo Group isWe are exposed to the possibility of significant claims in currencies other than U.S. Dollars. We may, from time to time, experience losses resulting from fluctuations in these non-U.S. currencies, which could materially and adversely affect our operating results.

Risks Related to Taxation

Tax Risks Associated with Taxation of the CompanyArgo Group

U.S. Tax Risks

Argo Group and Argo Group’s non-U.S. subsidiaries may be subject to U.S. tax, which may have a material adverse effect on Argo Group’sour financial condition and operating results.

Argo Group and Argo Group’s non-U.S. subsidiaries have operated and intend to continue to operate in a manner that should not cause them to be treated as engaged in a trade or business in the United States (and, in the case of those non-U.S. companies qualifying for treaty protection, in a manner that should not cause any of such non-U.S. subsidiaries to be doing business through a permanent establishment in the United States) and, thus, Argo Group believes that it and its non-U.S. subsidiaries should not be subject to U.S. federal income taxes or branch profits tax (other than withholding taxes on certain U.S. source investment income and excise taxes on insurance or reinsurance premiums). However, because there is uncertainty as to the activities that constitute being engaged in a trade or business within the United States, and as to what constitutes a permanent establishment under the applicable tax treaties, there can be no assurances that the United States Internal Revenue Service (“IRS”) will not contend successfully that one or more of the non-U.S. subsidiaries is engaged in a trade or business, or carrying on business through a permanent establishment, in the United States.

The reinsurance agreements between Argo Group and Argo Group’s U.S. subsidiaries may be subject to recharacterization or other adjustment for U.S. federal income tax purposes, which may have a material adverse effect on Argo Group’sour financial condition and operating results.

Under Section 845 of the Internal Revenue Code, the IRS may allocate income, deductions, assets, reserves, credits and any other items related to a reinsurance agreement among certain related parties to the reinsurance agreement, recharacterize such items, or make any other adjustment, in order to reflect the proper source, character or amount of the items for each party. No regulations have been issued under Section 845 of the Code. Accordingly, the application of such provisions is uncertain and Argo Groupwe cannot predict what impact, if any, such provisions may have on itus and itsour subsidiaries.

Index to Financial Statements

Changes in U.S. federal income tax law could be retroactive and may subject Argo Group or its non-U.S. subsidiaries to U.S. federal income taxation.

Legislation has been introduced in the U.S. Congress intendedattempting to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the United States but have certain U.S. connections. There are currently pending legislative proposals which, if enacted, could have a material adverse effect on Argo Groupus or itsour shareholders. For example, legislation has been introduced in Congress to limit the deductibility of reinsurance premiums paid by U. S.U.S. companies to foreign affiliates that, if enacted, could adversely impact our results. It is possible that broader-based or new legislative proposals could emerge in the future that could have an adverse effect on Argo Group or itsour shareholders.

The tax laws and interpretations thereof are subject to change, possibly on a retroactive basis. Argo Group isWe are not able to predict if, when or in what form such changes will be provided and whether such guidance will be applied on a retroactive basis.

The Mergermerger between PXRE and Argonaut may have adverse U.S. federal income tax consequences on Argo Group under certain circumstances.

Section 7874 of the Code was added in 2004 by the American Jobs Creation Act of 2004 to address inversion transactions, which refer in relevant part to transactions where a U.S. corporation becomes a subsidiary of a foreign corporation. This provision provides that in certain instances a foreign corporation may be treated as a domestic corporation for U.S. federal income tax purposes.

Because the former holders of Argonaut Group common stock did not own 80% or more of the stock (by vote or value) of Argo Group immediately after the Merger, Argomerger of Argonaut Group believesand PXRE, we believe that neither Argo Group nor any of its non-U.S. affiliates should be treated as a domestic corporation subject to U.S. taxation under Section 7874 of the Code. Moreover, although the former holders of Argonaut Group common stock held more than 60% of the stock (by vote and value) of Argo Group immediately after the inversion transaction, Argo Group believeswe believe that it should not recognize current gain under Section 7874 of the Code or otherwise as a result of the Mergermerger of Argonaut Group and PXRE. It is possible that, as a result of certain transfers or licenses of stock or other property, as the case may be, during the applicable period (including the transfer of any income received or accrued during the applicable period by reason of a license of any property by Argonaut Group), Argonaut Group could recognize inversion gain during the applicable period. However, Argo Group doeswe do not anticipate such transfers taking place and thus do not expect to recognize any inversion gain during the applicable period.

Bermuda Tax Risks

Argo Group and Argo Group’s Bermuda subsidiaries may become subject to Bermuda taxes after 2016.

Bermuda currently imposes no income tax on corporations. Argo Group hasIn addition, we have obtained an assurance from the Bermuda Minister of Finance, under The Exempted Undertakings Tax Protection Act 1966 of Bermuda, that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to Argo Groupus or Argo Group’sour Bermuda subsidiaries, until March 28, 2016. Argo GroupWe cannot assure you that Argo Group or its Bermuda subsidiaries will not be subject to any Bermuda tax after that date.

The OrganizationHowever, on February 18, 2011, a Bill was presented to the Bermuda Legislature which, if passed, will extend the period of the assurance mentioned above from 2016 to March 31, 2035. It is anticipated that this Bill will become operative in the next few months at which time we will immediately apply for Economic Cooperationthe new assurance (which in the past has been granted on request) and Development and other multinational organizations are considering measures that might increase our taxes and reduce Argo Group’s net income.

The Organization for Economic Cooperation and Development, which is commonly referred to asassuming the OECD, has published reports and launched a global dialogue among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteractingissue of the effects of tax havens and preferential tax regimes in countries aroundnew assurance, the world. In the OECD’s report dated April 18, 2002 and updated as of May 2009, Bermuda was not listed as an uncooperative tax haven jurisdiction because it had previously committed to eliminate harmful tax practices and to embrace international tax standards for transparency, exchange of information and the eliminationimposition of any aspects of the regimes for financial and other services that attract business withtax as mentioned above would not substantial domestic activity. We are not ablebe applicable to predict what changes will arise from the commitmentus or whether such changes will subject usour Bermuda subsidiaries, until March 31, 2035.

Index to additional taxes.

Financial Statements

U.K. Tax Risks

Our non-U.K. companies may be subject to U.K. tax.

We intend to operate in such a manner so that none of our companies other than Argo International, which manages Syndicate 1200 at Lloyd’s, Argo Management Services, Ltd,Ltd., Argo Management Holdings, Ltd., Argo Managing Agency, Ltd. and Argo Direct, Ltd. should be resident in the U.K. for tax purposes or have a permanent establishment in the U.K. Accordingly, we expect that none of our companies other than Argo International should be subject to U.K. taxation. However, since applicable law and regulations do not conclusively define the activities that constitute conducting business in the U.K. through a permanent establishment, the U.K. Inland Revenue might contend successfully that one or more of our other companies is conducting business in the U.K. through a permanent establishment in the U.K.

Any arrangements between U.K.-resident entities of Argo Group and other members of Argo Group are subject to the U.K. transfer pricing regime. Consequently, if any agreement between a U.K.-resident entity of Argo Group and any other Argo Group entity (whether that entity is resident in or outside the U.K.) is found not to be on arm’s length terms and as a result a U.K. tax advantage is being obtained, an adjustment will be required to compute U.K. taxable profits as if such an agreement were on arm’s length terms. Any transfer pricing adjustment could adversely impact the tax charge incurred by the relevant U.K.-resident entities of Argo Group.

Irish Tax Risks

Dividends paid by Argo Group’sour U.S. subsidiaries to Argo Ireland may not be eligible for benefits under the U.S.-Ireland income tax treaty.

Under U.S. federal income tax law, dividends paid by a U.S. corporation to a non-U.S. shareholder are generally subject to a 30% withholding tax, unless reduced by treaty. The income tax treaty between the Republic of Ireland and the United States (“the Irish Treaty”) reduces the rate of withholding tax on certain dividends to 5%. Were the IRS to contend successfully that Argo Financial Holdings, Ltd (“Argo Ireland”) Argo Ireland is not eligible for benefits under the Irish Treaty, any dividends paid by Argo Group’s U.S. subsidiaries to Argo Ireland would be subject to the 30% withholding tax. Such a result could have a material adverse effect on Argo Group’sour financial condition and operating results.

Tax Risks Associated with Our Shareholders

If you are a U.S. non-corporate shareholder, dividends you receive from Argo Group will not be eligible for reduced rates of tax upon enactment of certain legislative proposals or after 20102012 if legislation is not enacted extending the “qualified dividend” income provisions.

Dividends are generally considered to be ordinary income subject, in the case of individuals, to rates of tax up to 35%. However, dividends paid by a qualified foreign corporation, such as Argo Group, to U.S. non-corporate holders of its common shares, are eligible for reduced rates of taxation (based on the long-term capital gain rates) up to a maximum of 15%. The application of these reduced rates is, however, set to expire in 2011. Argo Group,2013. We, therefore, cannot assure you that any dividends paid by Argo Group after 20102012 would continue to qualify for reduced rates of tax.

Moreover, legislation has been introduced in the U.S. Congress that would, if enacted, deny the applicability of reduced rates to dividends paid by any corporation organized under the laws of a foreign country that does not have a comprehensive income tax system, such as Bermuda. It is possible that this legislative proposal could become law before 20112013 or that it could apply retroactively. Therefore, depending on whether, when and in what form this legislative proposal is enacted, Argo Groupwe cannot assure you that any dividends paid by Argo Group in the future would qualify for reduced rates of tax.

Index to Financial Statements

If Argo Group is classified as a passive foreign investment company, which we refer to as a PFIC, your taxes would increase.

In order to avoid significant potential adverse U.S. federal income tax consequences for any U.S. person who owns our common shares, we must not constitute a passive foreign investment company in any year in which such U.S. person is a shareholder. Those consequences could include increasing the tax liability of the investor, accelerating the imposition of the tax and causing a loss of the basis step-up on the death of the investor. In general, a non-U.S. corporation is a passive foreign investment company for a taxable year if 75% or more of its income constitutes passive income or 50% or more of its assets produce passive income. Passive income generally includes interest, dividends and other investment income. However, passive income does not include income derived in the active conduct of an insurance business by a company that is predominantly engaged in an insurance business. This exception is intended to ensure that income derived by a bona fide insurance company is not treated as passive income, except to the extent such income is attributable to financial reserves in excess of the reasonable needs of the insurance business. Argo Group believes that it should not be, and currently does not expect to become, a PFIC for U.S. federal income tax purposes; however, Argo Groupwe cannot assure you that itwe will not be deemed a PFIC by the IRS based, in part, on Argo Group’s recent limited operations.IRS. There are currently no regulations regarding the application of the PFIC provisions to an insurance company. New regulations or pronouncements interpreting or clarifying these rules may be forthcoming. Argo GroupWe cannot predict what impact, if any, such guidance would have on persons subject to U.S. federal income tax that directly or indirectly own Argo Group’s shares.

If you acquire 10% or more of Argo Group’s shares and Argo Group or one or more of its non-U.S. subsidiaries is classified as a controlled foreign corporation (“CFC”) your taxes could increase.

Each U.S. person who, directly, indirectly, or through attribution rules, owns 10% or more of our common shares should consider the possible application of the controlled foreign corporation rules.

Each U.S. 10% shareholder of a controlled foreign corporation on the last day of the controlled foreign corporation’s taxable year generally must include in its gross income for U.S. federal income tax purposes its pro-rata share of the controlled foreign corporation’s subpart F income, even if the subpart F income has not been distributed. In general, a non-U.S. insurance company is treated as a controlled foreign corporation only if such U.S. 10% shareholders collectively own more than 25% of the total combined voting power or total value of the company’s capital stock for an uninterrupted period of 30 days or more during any year. We believe that, because of the anticipated dispersion of share ownership among holders and because of the restrictions in our bye-laws on transfer, issuance or repurchase of our common shares, shareholders will not be subject to treatment as U.S. 10% shareholders of a controlled foreign corporation. In addition, because under our bye-laws no single shareholder is permitted to exercise 9.5% or more of the total combined voting power, unless such provision is waived by the unanimous consent of the board of directors, we believe that our shareholders should not be viewed as U.S. 10% shareholders of a controlled foreign corporation for purposes of the controlled foreign corporation rules. We cannot assure shareholders, however, that these rules will not apply to our shareholders.

Argo GroupWe cannot assure you that Argo Group or its non-U.S. subsidiaries will not be classified as CFCs. Argo Group believesWe believe that because of the anticipated dispersion of itsArgo Group’s common share ownership, provisions in Argo Group’s organizational documents that limit voting power and other factors, no United States person who (i) owns Argo Group’s shares directly or indirectly through one or more non-U.S. entities and (ii) has not received a waiver from Argo Group’s board of directors of provisions in Argo Group’s organizational documents that limit voting power, should be treated as owning (directly, indirectly through non-U.S. entities or constructively) 10% or more of the total voting power of all classes of the shares of Argo Group or any of its non-U.S. subsidiaries.

Due to the attribution provisions of the Code regarding determination of beneficial ownership, there is a risk that the IRS could assert that Argo Group or one or more of its non-U.S. subsidiaries are CFCs and that U.S. holders of Argo Group’s shares who own 10% or more of the value of Argo Group’s shares should be treated as owning 10% or more of the total voting power of Argo Group, and/or its non-U.S. subsidiaries, notwithstanding the reduction of voting power discussed above.

If one or more of Argo Group’sour non-U.S. subsidiaries is determined to have related person insurance income (“RPII”), you may be subject to U.S. taxation on your pro rata share of such income.

If the RPII of any of Argo Group’sour non-U.S. insurance subsidiaries were to equal or exceed 20% of such company’s gross insurance income in any taxable year and direct or indirect insureds (and persons related to such insureds) own, directly or indirectly through entities, 20% or more of Argo Group’sour voting power or value, then a U.S. person who owns Argo Group’sour shares (directly or indirectly through non-U.S. entities) on the last day of the taxable year would be required to include in its income for U.S. federal income tax purposes such person’s pro rata share of such non-U.S. insurance subsidiary’s RPII for the entire taxable year, determined as if such RPII were distributed proportionately only to U.S. persons at that date regardless of whether such income is distributed. In addition, any RPII that is includible in the income of a U.S. tax-exempt organization may be treated as unrelated business taxable income. The amount of RPII earned by the non-U.S. insurance subsidiaries (generally, premium and related investment income from the direct or indirect insurance or reinsurance of any direct or indirect U.S. holder of common shares or any person related to such holder) will depend on a number of factors, including the identity of persons directly or indirectly insured or reinsured by the non-U.S. insurance subsidiaries. Argo Group believesWe believe that the gross RPII of each non-U.S. insurance subsidiary did not in prior years of operation and is not expected in the foreseeable future to equal or exceed 20% of such subsidiary’s gross insurance income. Additionally, Argo Group doeswe do not expect the direct or indirect insureds of itsour non-U.S. insurance subsidiaries (and persons related to such insureds) to directly or indirectly own 20% or more of either the voting power or value of itsour shares. No assurance can be given that this will be the case because some of the factors that determine the existence or extent of RPII may be beyond Argo Group’sour knowledge and/or control.

Index to Financial Statements

The RPII rules provide that if a U.S. person disposes of shares in a non-U.S. insurance corporation in which U.S. persons own 25% or more of the shares (even if the amount of RPII is less than 20% of the corporation’s gross insurance income and the ownership of its shares by direct or indirect insureds and related persons is less than the 20% threshold), any gain from the disposition will generally be treated as ordinary income to the extent of the U.S. person’s share of the corporation’s undistributed earnings and profits that were accumulated during the period that the U.S. person owned the shares (whether or not such earnings and profits are attributable to RPII). In addition, such U.S. person will be required to comply with certain reporting requirements, regardless of the amount of shares owned by the U.S. person. These RPII rules should not apply to dispositions of Argo Group’sour shares because Argo Groupwe will not itselfourselves be directly engaged in the insurance business. The RPII provisions, however, have never been interpreted by the courts or the U.S. Treasury Department in final regulations, and regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether these regulations will be adopted in their proposed form or what changes or clarifications might ultimately be made thereto or whether any such changes, as well as any interpretation or application of RPII by the IRS, the courts or otherwise, might have retroactive effect. The U.S. Treasury Department has authority to impose, among other things, additional reporting requirements with respect to RPII. Accordingly, the meaning of the RPII provisions and the application of those provisions to Argo Groupus and itsour non-U.S. subsidiaries are uncertain.

U.S. tax-exempt organizations that own Argo Group’sour shares may recognize unrelated business taxable income.

A U.S. tax-exempt organization may recognize unrelated business taxable income if a portion of Argo Group’sour insurance income is allocated to the organization. In general, insurance income will be allocated to a U.S. tax-exempt organization if either Argo Group iswe are a CFC and the tax-exempt shareholder is a 10% U.S. Shareholder or there is RPII and certain exceptions do not apply. Although Argo Group doeswe do not believe that any U.S. persons should be allocated such insurance income, Argo Groupwe cannot be certain that this will be the case. U.S. tax-exempt investors should consult their tax advisors as to the U.S. tax consequences of any allocation of Argo Group’sour insurance income.

The payment of the special cash dividend to Argonaut Group shareholders made in July 2007 could result in adverse U.S. federal income tax consequences to shareholders and to Argo Groupus under certain circumstances.

Argo Group intends to take the position that the amount paid as the special cash dividend is treated as a distribution with respect to the Argonaut Group common stock, and not as consideration in the Merger. Although Argo Group believes itswe believe our position with respect to the special cash dividend is correct, the IRS may take a contrary position, and to the extent the IRS were to prevail, the amount paid as the special cash dividend would be treated as additional cash received in connection with the Merger and not as a distribution for U.S. federal income tax purposes. If the special cash dividend were to be treated as Merger consideration, it is possible that the special cash dividend would be deemed to be paid from Argonaut Group to Argo Group, in which case a U.S. 30% withholding tax wouldcould be imposed on such payment.

Risks Related to Capital Structure

Argo Group’s insurance and reinsurance subsidiaries are subject to risk-based capital and solvency requirements under their respective regulatory domiciles.

TheA risk-based capital system is designed to measure whether the amount of available capital is adequate to support the inherent specific risks of each insurer. Risk-based capital is calculated annually. Authorities use the risk-based capital formula to identify insurance companies that may be undercapitalized and thus may require further regulatory attention. The formula prescribes a series of risk measurements to determine a minimum capital amount for an insurance company, based on the profile of the individual company. The ratio of a company’s actual policyholder surplus to its minimum capital requirements will determine whether any state regulatory action is required.

Argo Group US. Argo Group U.S. is subject torequired based on the risk-based capital system outlined in the Risk-Based Capital for Insurers Model Act. This Act provides four levels of regulatory activity if the risk-based capital ratio yielded by the calculation falls below specified minimums. At each of four successively lower risk-based capital ratios specified by statute, increasing regulatory remedies become available, some of which are mandatory. The four levels are: (i) Company Action Level Event, (ii) Regulatory Action Level Event, (iii) Authorized Control Level Event, and (iv) Mandatory Control Level Event. As of December 31, 2009, all U.S. subsidiaries had risk-based capital ratios that exceed specified minimums. If we fall below the minimum acceptable risk-based capital level, we would be subject to additional regulation.respective local thresholds.

Argo International. Argo International is subject

Index to the risk-based capital requirements under the Financial Services and Markets Act.

Argo Re. Argo Re is subject to the Bermuda Solvency Capital Requirement (“BSCR”), a risk-based capital system mandated by the Bermuda Insurance (Prudential Standards)(Class 4 Solvency Requirement) Order 2008.

Statements

As a result of these and other requirements, we may require additional capital in the future that may not be available to us on commercially favorable terms. Our future capital requirements depend on many factors, including our ability to underwrite new business and to establish premium rates and reserves at levels sufficient to cover losses. To the extent that the funds generated by insurance premiums received and sale proceeds and income from our investment portfolio are insufficient to fund future operating requirements and cover losses and loss expenses, we may need to raise additional funds through financings or curtail our growth and reduce our assets. The current financial market crisis has created unprecedented uncertainty in the equity and credit markets and has affected our ability, and the ability of others within our industry, to raise additional capital in the public or private markets. Any future financing, if available at all, may be on terms that are not favorable to us. In the case of equity financing, dilution to our shareholders could result, and the securities issued may have rights, preferences and privileges that are senior or otherwise superior to those of our common shares.

United States. Argo Group U.S. is subject to the risk-based capital system outlined in the Risk-Based Capital for Insurers Model Act. This Act provides four levels of regulatory activity if the risk-based capital ratio yielded by the calculation falls below specified minimums. At each of four successively lower risk-based capital ratios specified by statute, broader regulatory remedies become available. The four levels are: (i) Company Action Level Event, (ii) Regulatory Action Level Event, (iii) Authorized Control Level Event and (iv) Mandatory Control Level Event. As of December 31, 2010, all U.S. subsidiaries had risk-based capital ratios that exceed specified minimums. If we fall below the minimum acceptable risk-based capital level, we would be subject to additional regulation.

United Kingdom.Argo International is subject to the risk-based capital requirements under the Financial Services and Markets Act. In addition, Solvency II, the enhanced EU regulatory regime which was enacted in November 2009, imposes new solvency and governance requirements across all EU Member States and is expected to be implemented on December 31, 2012. Based on the official EU-wide requisites, Lloyd’s has introduced its own implementation plan and requirements with which Argo International will be expected to comply. Due to ongoing development efforts at the EU-level, the specific impact of Solvency II on our results of operations or our financial condition cannot be determined at this time.

Bermuda. Argo Re is subject to the Bermuda Solvency Capital Requirement (���BSCR”), a risk-based capital system mandated by the Bermuda Insurance (Prudential Standards)(Class 4 Solvency Requirement) Order 2008. Because the application and methods of calculating the BSCR required by the Bermuda Monetary Authority remain under development, the specific future impact on our solvency position cannot be determined at this time.

We are unable to predict whether any of these laws, frameworks and/or regulations will be adopted, the form in which any such laws, frameworks and/or regulations would be adopted, or the effect, if any, these developments would have on our operations and financial condition.

Argo Group may incur significant additional indebtedness.

Argo Group may seek to incur additional indebtedness either through the issuance of public or private debt or through bank or other financing. The funds raised by the incurrence of such additional indebtedness may be used to repay existing indebtedness, of the parties, including amounts borrowed under Argo Group US’sGroup’s credit facility, Argo Group’s outstanding subordinated debt and Argo Group’s floating rate loan stock, or for general corporate purposes of Argo Group, including additions to working capital, capital expenditures, investments in subsidiaries or acquisitions.

This additional indebtedness, particularly if not used to repay existing indebtedness, could limit Argo Group’sour financial and operating flexibility, including as a result of the need to dedicate a greater portion of itsour cash flows from operations to interest and principal payments. It may also be more difficult for Argo Groupus to obtain additional financing on favorable terms, if at all, limiting Argo Group’sour ability to capitalize on significant business opportunities and making Argo Groupus more vulnerable to economic downturns.

Index to Financial Statements

Item 1B.  Unresolved Staff Comments

None.

Item 2.  Properties

Argo Group leases office space in Bermuda, where its principal executive offices are located. Argo Group US leases office space in San Antonio, Texas, for its United States headquarters, its Commercial Specialty subsidiary company, and for certain support functions associated with Argonaut Insurance Company. Argo Group also leases space in the following locations:

In addition, the Company haswe have entered into other leases in conjunction with itsour operations at various geographic locations throughout the world. The properties are leased on terms and for durations that are reflective of commercial standards in the communities where these properties are located. Argo Group believesWe believe the facilities it occupieswe occupy are adequate for the purposes in which they are currently used and are well maintained.

Item 3.  Legal Proceedings

Between May 3, 2006 and June 16, 2006, several class action lawsuits were filed against PXRE Group Ltd. (now Argo Group) and certain former officers of PXRE on behalf of a putative class of plaintiffs consisting of investors who purchased PXRE securities traded on the NYSE under the ticker symbol “PXT” between September 11, 2005 and February 22, 2006. These lawsuits were consolidated into one proceeding before the United States District Court for the Southern District of New York and were the subject of an Amended Class Action Complaint filed on June 15, 2007 (the “Amended Complaint”). The Amended Complaint alleges that during the purported class period PXRE fraudulently understated the full impact of hurricanes Katrina, Rita and Wilma on PXRE’s business and that certain PXRE executives made a series of materially false and misleading statements or omissions about PXRE’s business, prospects and operations in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), and Rule 10b-5 promulgated under the 1934 Act. On March 4, 2009, the Amended Complaint was dismissed with prejudice by the District Court. On December 21, 2009 the District Court’s decision was affirmed on appeal to the United States Court of Appeals for the Second Circuit, and the class plaintiff’s petition for rehearing was denied by the Court of Appeals on January 11, 2010.

On December 4, 2008, a lawsuit was filed against PXRE.,PXRE Group Ltd. (now Argo GroupGroup) and certain of PXRE’s former officers in United States District Court for the Southern District of New York alleging causes of action based on facts and circumstances on behalf of a group of institutional shareholders that purchased Series D Perpetual Non-voting Preferred Shares of PXRE pursuant to the Private Placement Memorandum dated on or about September 28, 2005 (the “Private Placement”). The lawsuit alleges that the Private Placement was a public offering and that the Private Placement Memorandum contained false and misleading statements or omissions concerning PXRE’s business, prospects and operations actionable under Section 12(a) (2) of the Securities Act of 1933. In addition, the lawsuit alleges claims under New York state law for negligent misrepresentation and common law fraud based upon, among other things, statements contained in the Private Placement Memorandum and alleged false and misleading statements by PXRE’s named former officers. The facts and circumstances of the Private Placement litigation arise generally out of statements or omissions relating to the impact of hurricanes Katrina, Rita and Wilma on PXRE. On April 6, 2009, the institutional investors filed an amended complaint. The CompanyArgo Group filed a motion to dismiss the amended complaint on May 6, 2009. On January 26, 2010 the District Court granted the Company’sour motion, dismissing the plaintiffs’ federal law causes of action without prejudice, and holding that the amended complaint failed to allege facts that would show that the Private Placement could be construed to be a public offering or that the Private Placement should be integrated with PXRE’s public share offering. The Court’s order provided the plaintiffs with a deadline of February 22, 2010 to file amended pleadings setting forth the nature of the entities to which the Private Placement was offered. Based on the dismissal of the federal law claims, the Court’s order also dismissed without prejudice all state law claims asserted by the plaintiffs for lack of subject matter jurisdiction, without prejudice to the plaintiffs’ right to file a separate action in state court asserting such claims. On February 22, 2010 the plaintiffs filed a Second Amended Complaint in the District Court case seeking to overcome the deficiencies outlined in the order of dismissal. At a pre-motion conference held on April 14, 2010, the Court indicated that the Second Amended Complaint was also insufficient to raise an issue of fact as to the federal law causes of action. The Company doesCourt allowed plaintiffs a third opportunity to replead, and plaintiffs filed their Third Amended Complaint on April 23, 2010. We do not believe that the SecondThird Amended Complaint is sufficient to comply with the relevant legal standard, and plans to fileon May 14, 2010 we filed a Motion to Dismiss accordingly.Plaintiffs’ Third Amended Complaint, which is currently set for oral argument on March 16, 2011.

Although the Company has received no notice of any other potential lawsuits or other proceedings relating

Index to the alleged facts and circumstances described above, it is possible that the Company could be the subject of additional litigation or regulatory inquiries regarding such matters in the future.

Financial Statements

At this stage, the CompanyArgo Group is unable to determine with any reasonable certainty the specific claims, litigants, or alleged damages that ultimately may be associated with the pending securities litigation, Private Placement lawsuit or any other future proceedings regarding the alleged facts and circumstances described above, nor can the Companywe currently predict the timing of any rulings, trials or other significant events relating to such proceedings. Given these limitations and the inherent difficulty of projecting the outcome of litigated disputes, the Company iswe are unable to reasonably estimate the possible loss, range of loss or legal costs that are likely to arise out of the pending securities litigation or any future proceedings relating to the above matters at this time. The CompanyArgo Group has insurance protection that may cover a portion of any potential loss or legal costs, but a settlement above the coverage limits could impact the Company’sour financial position.

Based on all information available to the CompanyArgo Group at this time, management of the Company believes that PXRE’s reserving practices, financial disclosures, public filings and securities offerings in the aftermath of the 2005 hurricanes complied fully with all applicable regulatory and legal requirements. However, if unfavorable outcomes in the class action litigation or Private Placement lawsuit were to occur and result in the payment of substantial damages or fines or criminal penalties, these outcomes could have a material adverse effect on the Company’sour business, cash flows, results of operations, financial position and prospects.

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

Item 4.   Removed and Reserved

PART II

Item 5.  Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market Information

The Company’sArgo Group’s common stock trades on the NASDAQ Global Select Market under the symbol “AGII.” The following table sets forth the range of high and low sales prices for the Company’sArgo Group’s common stock for fiscal years 20092010 and 2008:2009:

On February 24, 2010,16, 2011, the closing price of the Company’sArgo Group’s common stock was $28.49.$36.29.

Holders of Common Stock

The number of holders of record of the Company’sArgo Group’s common stock as of February 25, 201016, 2011 was 1,746.1,881.

Dividends

The dividend policy of the CompanyArgo Group is determined by the Board of Directors and depends, among other factors, upon the Company’sArgo Group’s earnings, operations, financial condition, capital requirements and general business outlook at the time the policy is considered. For the years ended December 31, 2009 and 2008, Argo Group did not pay any dividends to common shareholders. On February 19, 2010, the Company announced that theMay 5, 2010, August 10, 2010 and November 3, 2010, our Board of Directors has reinstateddeclared a quarterly cash dividend in the amount of $0.12 on each share of common stock outstanding to be disbursed onoutstanding. On March 15, 2010, June 15, 2010, September 15, 2010 and December 15, 2010, we paid $3.7 million, $3.6 million, $3.5 million and $3.4 million to our shareholders of record on March 1, 2010.2010, June 1, 2010, September 1, 2010 and December 1, 2010, respectively. For the year ended December 31, 2009, we did not pay dividends to our common shareholders. The declaration and payment of future dividends to the Company’sour shareholders will be at the discretion of the Company’sour Board of Directors and will depend upon the factors noted above.

On February 18, 2011, our Board of Directors declared a quarterly cash dividend in the amount of $0.12 on each share of common stock outstanding. The dividend will be paid on March 15, 2011 to our shareholders of record on March 1, 2011.

Sale of Unregistered Securities

During the year ended December 31, 2009, the Company2010, we did not sell or issue any unregistered securities.

Index to Financial Statements

Use of Proceeds from Sale of Registered Securities

During the year ended December 31, 2009, the Company2010, we did not sell or issue any registered securities.

Issuer Purchases of Equity Securities

On November 13, 2007, theour Board of Directors authorized the repurchase of up to $150$150.0 million of Argo Group’s common stock. The Company did not repurchase anyshares. From January 1, 2010 through February 22, 2011, we have repurchased 3,623,851 shares during 2009, and as of December 31, 2009 had purchased 145,999our common stock for a total cost of $121.3 million. Since the inception of the buy-back program in 2007, we have repurchased 3,769,850 shares at an average price of $35.23 (total$33.54 for a total cost of $5.1 million repurchased). Shares of stock repurchased will be$126.4 million. These shares are being held as treasury shares in accordance with the provisions of the Bermuda Companies Act 1981.

On February 18, 2011, our Board of Directors authorized the repurchase of up to $150.0 million of our common shares. This authorization supercedes the November 13, 2007 repurchase program.

The following table provides information with respect to shares of the Company’sour common stock that were repurchased or surrendered during the three months ended December 31, 2009:2010: