0001628280-20-015488.txt : 20201104 0001628280-20-015488.hdr.sgml : 20201104 20201104154521 ACCESSION NUMBER: 0001628280-20-015488 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 101 CONFORMED PERIOD OF REPORT: 20200930 FILED AS OF DATE: 20201104 DATE AS OF CHANGE: 20201104 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Argo Group International Holdings, Ltd. CENTRAL INDEX KEY: 0001091748 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 980214719 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15259 FILM NUMBER: 201286435 BUSINESS ADDRESS: STREET 1: 110 PITTS BAY ROAD CITY: PEMBROKE STATE: D0 ZIP: HM 08 BUSINESS PHONE: 4412965858 MAIL ADDRESS: STREET 1: 110 PITTS BAY ROAD CITY: PEMBROKE STATE: D0 ZIP: HM 08 FORMER COMPANY: FORMER CONFORMED NAME: PXRE GROUP LTD DATE OF NAME CHANGE: 19990724 10-Q 1 argo-20200930.htm ARGO GROUP INTERNATIONAL HOLDINGS, LTD. FORM 10-Q - SEPTEMBER 30, 2020 argo-20200930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2020
or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from              to             
Commission file number: 1-15259
ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
 
Bermuda 98-0214719
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification Number)
110 Pitts Bay Road P.O. Box HM 1282
PembrokeHM08HamiltonHM FX
BermudaBermuda
(Address of principal executive offices) (Mailing address)
(441) 296-5858
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value of $1.00 per shareARGONew York Stock Exchange
Guarantee of Argo Group U.S., Inc.  6.500% Senior Notes due 2042ARGDNew York Stock Exchange
Depositary Shares, each representing a 1/1000th Interest in a share
of Series A 7.00% Non-Cumulative Preference Shares, par value $1.00 per share
ARGOPrANew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerAccelerated filerNon-accelerated filer

Smaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark whether the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
Indicate the number of shares outstanding (net of treasury shares) of each of the issuer’s classes of common shares as of November 2, 2020.
TitleOutstanding
Common Shares, par value $1.00 per share34,684,684



ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
INDEX
 
  Page
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 

2

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements
ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except number of shares and per share amounts)
 
September 30,
2020
December 31,
2019 *
 (Unaudited) 
Assets  
Investments:  
Fixed maturities available-for-sale, at fair value (cost: 2020 - $3,847.0, 2019 - $3,605.0; allowance for expected credit losses: 2020 - $33.7)
$3,914.4 $3,633.5 
Equity securities, at fair value (cost: 2020 - $160.6; 2019 - $122.8)
150.7 124.4 
Other investments (cost: 2020 - $412.1; 2019 - $482.5)
412.2 496.5 
Short-term investments, at fair value (cost: 2020 - $528.5; 2019 - $844.8)
528.7 845.0 
Total investments5,006.0 5,099.4 
Cash300.4 137.8 
Accrued investment income22.2 25.7 
Premiums receivable797.0 688.2 
Reinsurance recoverables3,046.5 3,104.6 
Goodwill 156.5 161.4 
Intangible assets, net of accumulated amortization90.8 91.8 
Current income taxes receivable, net11.2  
Deferred tax asset, net17.0 6.1 
Deferred acquisition costs, net170.4 160.2 
Ceded unearned premiums660.9 545.0 
Operating lease right-of-use assets84.4 91.8 
Other assets358.5 387.1 
Assets held for sale12.5 15.4 
Total assets$10,734.3 $10,514.5 
Liabilities and Shareholders' Equity
Reserves for losses and loss adjustment expenses$5,390.0 $5,157.6 
Unearned premiums1,574.2 1,410.9 
Accrued underwriting expenses and other liabilities202.8 226.0 
Ceded reinsurance payable, net1,085.0 1,203.1 
Funds held62.6 50.6 
Senior unsecured fixed rate notes140.1 140.0 
Other indebtedness59.1 181.3 
Junior subordinated debentures257.7 257.4 
Current income taxes payable, net 0.8 
Operating lease liabilities98.3 105.7 
Total liabilities8,869.8 8,733.4 
Commitments and contingencies (Note 14)
Shareholders' equity:
Preferred shares and additional paid-in capital - $1.00 par, 30,000,000 shares authorized; 6,000 and 0 shares issued at September 30, 2020 and December 31, 2019, respectively; liquidation preference $25,000
144.0  
Common shares - $1.00 par, 500,000,000 shares authorized; 45,985,685 and 45,698,470 shares issued at September 30, 2020 and December 31, 2019, respectively
46.0 45.7 
Additional paid-in capital1,378.5 1,376.6 
Treasury shares (11,315,889 shares at September 30, 2020 and December 31, 2019, respectively)
(455.1)(455.1)
Retained earnings714.2 811.1 
Accumulated other comprehensive income, net of taxes36.9 2.8 
Total shareholders' equity1,864.5 1,781.1 
Total liabilities and shareholders' equity$10,734.3 $10,514.5 
*    Derived from audited consolidated financial statements. 
See accompanying notes.
3

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(in millions, except number of shares and per share amounts)
(Unaudited)
 
 
 For the Three Months Ended
September 30,
For the Nine Months Ended
September 30,
 2020201920202019
Premiums and other revenue:  
Earned premiums$445.5 $451.5 $1,313.9 $1,303.7 
Net investment income42.0 40.2 79.0 116.9 
Fee and other income1.7 1.9 5.8 6.3 
Net realized investment gains (losses):
Net realized investment (losses) gains (5.7)2.6 33.3 0.3 
Change in fair value of equity securities10.5 (8.8)(12.0)58.0 
Credit losses on fixed maturity securities(10.5) (43.0) 
Net realized investment (losses) gains(5.7)(6.2)(21.7)58.3 
Total revenue483.5 487.4 1,377.0 1,485.2 
Expenses:
Losses and loss adjustment expenses328.9 338.8 883.0 861.5 
Underwriting, acquisition and insurance expenses164.3 164.0 493.7 485.6 
Other corporate expenses0.4 3.7 6.2 11.7 
Interest expense6.8 7.5 21.3 25.3 
Fee and other expense0.9 1.2 3.1 3.8 
Foreign currency exchange losses (gains)11.6 (1.6)15.0 (6.2)
Total expenses512.9 513.6 1,422.3 1,381.7 
(Loss) income before income taxes(29.4)(26.2)(45.3)103.5 
Income tax provision (benefit)0.2 (1.1)9.5 8.6 
Net (loss) income $(29.6)$(25.1)$(54.8)$94.9 
Dividends on preferred shares2.02.0
Net (loss) income attributable to common shareholders$(31.6)$(25.1)$(56.8)$94.9 
Net (loss) income per common share:
Basic$(0.91)$(0.73)$(1.64)$2.78 
Diluted$(0.91)$(0.73)$(1.64)$2.73 
Dividend declared per common share$0.31 $0.31 $0.93 $0.93 
Weighted average common shares:
Basic34,667,266 34,299,999 34,590,659 34,161,016 
Diluted34,667,266 34,299,999 34,590,659 34,769,622 

 For the Three Months Ended
September 30,
For the Nine Months Ended
September 30,
 2020201920202019
Net realized investment gains (losses) before other-than-temporary impairment losses
$(5.7)$(1.2)$(21.7)$70.1 
Other-than-temporary impairment losses recognized in earnings:
Other-than-temporary impairment losses on fixed maturities
 (5.0) (11.8)
Impairment losses recognized in earnings (5.0) (11.8)
Net realized investment gains (losses) $(5.7)$(6.2)$(21.7)$58.3 
 
See accompanying notes.
4

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in millions)
(Unaudited)
 
 For the Three Months Ended
September 30,
For the Nine Months Ended
September 30,
 2020201920202019
Net (loss) income$(29.6)$(25.1)$(54.8)$94.9 
Other comprehensive income (loss):
Foreign currency translation adjustments(4.7) (12.3)(0.1)
Unrealized gains (losses) on fixed maturity securities:
Gains (losses) arising during the year38.2 (7.4)68.3 91.3 
Reclassification adjustment for losses (gains) included in net income4.5 2.8 (15.4)7.7 
Other comprehensive income before tax38.0 (4.6)40.6 98.9 
Income tax provision related to other comprehensive income:
Unrealized gains (losses) on fixed maturity securities:
Gains (losses) arising during the year6.5 (0.7)12.4 15.1 
Reclassification adjustment for losses (gains) included in net income0.5 0.3 (0.2)1.0 
Income tax provision related to other comprehensive income
7.0 (0.4)12.2 16.1 
Other comprehensive income (loss), net of tax 31.0 (4.2)28.4 82.8 
Comprehensive income (loss) $1.4 $(29.3)$(26.4)$177.7 
 
See accompanying notes.

5

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions, except number of shares and per share amounts)
(Unaudited)
 
 Preferred Shares and Additional Paid-in CapitalCommon
Shares
Additional
Paid-In
Capital
Treasury
Shares
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Shareholders'
Equity
Balance, June 30, 2019$— $45.6 $1,369.7 $(455.1)$959.9 $8.9 $1,929.0 
Net income
— — — — (25.1)— (25.1)
Other comprehensive income - Change in fair value of fixed maturities, net of tax
— — — — — (4.2)(4.2)
Other comprehensive loss, net - Other
— — — — —   
Activity under stock incentive plans
—  3.2 — — — 3.2 
Retirement of common shares (tax payments on equity compensation)
—  (0.3)— — — (0.3)
Employee stock purchase plan
— — 0.6 — — — 0.6 
Cash dividend declared - common shares ($0.31/share)
— — — — (9.8)— (9.8)
Balance, September 30, 2019$— $45.6 $1,373.2 $(455.1)$925.0 $4.7 $1,893.4 
Balance, June 30, 2020$ $46.0 $1,376.5 $(455.1)$756.7 $5.9 $1,730.0 
Net loss
— — — — (29.6)— $(29.6)
Preferred shares issued144.0 — — — — — $144.0 
Other comprehensive income - Change in fair value of fixed maturities, net of taxes
— — — — — 35.7 $35.7 
Other comprehensive loss, net - Other
— — — — — (4.7)$(4.7)
Activity under stock incentive plans
—  1.5 — — — $1.5 
Retirement of common shares (tax payments on equity compensation)
—  (0.1)— — — $(0.1)
Employee stock purchase plan
— — 0.6 — — — $0.6 
Dividends on preferred shares— — — — (2.0)— $(2.0)
Cash dividend declared - common shares ($0.31/share)
— — — — (10.9)— $(10.9)
Balance, September 30, 2020$144.0 $46.0 $1,378.5 $(455.1)$714.2 $36.9 $1,864.5 

See accompanying notes.
6


ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)
(in millions, except number of shares and per share amounts)
(Unaudited)
 Preferred Shares and Additional Paid-in CapitalCommon
Shares
Additional
Paid-In
Capital
Treasury
Shares
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Shareholders'
Equity
Balance, December 31, 2018$— $45.3 $1,372.0 $(455.1)$862.6 $(78.1)$1,746.7 
Net income
— — — — 94.9 — 94.9 
Other comprehensive income - Change in fair value of fixed maturities, net of tax
— — — — — 82.9 82.9 
Other comprehensive loss, net - Other
— — — — — (0.1)(0.1)
Activity under stock incentive plans
— 0.4 10.6 — — — 11.0 
Retirement of common shares (tax payments on equity compensation)
— (0.1)(11.1)— — — (11.2)
Employee stock purchase plan
— — 1.7 — — — 1.7 
Cash dividend declared - common shares ($0.93/share)
— — — — (32.5)— (32.5)
Balance, September 30, 2019$— $45.6 $1,373.2 $(455.1)$925.0 $4.7 $1,893.4 
Balance, December 31, 2019$ $45.7 $1,376.6 $(455.1)$811.1 $2.8 $1,781.1 
Net loss
— — — — (54.8)— (54.8)
Preferred shares issued144.0 — — — — — 144.0 
Other comprehensive income - Change in fair value of fixed maturities, net of taxes
— — — — — 40.7 40.7 
Other comprehensive loss, net - Other
— — — — — (12.3)(12.3)
Activity under stock incentive plans
— 0.4 6.4 — — — 6.8 
Retirement of common shares (tax payments on equity compensation)
— (0.1)(6.5)— — — (6.6)
Employee stock purchase plan
— — 2.0 — — — 2.0 
Dividends on preferred shares— — — — (2.0)— (2.0)
Cash dividend declared - common shares ($0.93/share)
— — — — (32.2)— (32.2)
Cumulative effect of adoption of ASU 2016-13, net of taxes
— — — — (7.9)5.7 (2.2)
Balance, September 30, 2020$144.0 $46.0 $1,378.5 $(455.1)$714.2 $36.9 $1,864.5 

See accompanying notes.
7

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
  
 For the Nine Months Ended September 30,
 20202019
Cash flows from operating activities:  
Net (loss) income$(54.8)$94.9 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Amortization and depreciation24.7 20.4 
Share-based payments expense7.7 11.7 
Deferred income tax benefit, net(23.2)(2.2)
Net realized investment losses (gains)21.7 (58.3)
Undistributed earnings (loss) from alternative investment portfolio1.6 (19.4)
Loss on disposals of long-lived assets, net0.4  
Change in:
Accrued investment income3.5 (0.5)
Receivables(65.1)(282.6)
Deferred acquisition costs(11.7)7.5 
Ceded unearned premiums(120.5)(147.1)
Reserves for losses and loss adjustment expenses267.6 194.9 
Unearned premiums176.8 197.7 
Ceded reinsurance payable and funds held(102.2)204.8 
Income taxes (12.8)7.9 
Accrued underwriting expenses and other liabilities(7.4)8.5 
Other, net(4.9)(42.5)
Cash provided by operating activities101.4 195.7 
Cash flows from investing activities:
Sales of fixed maturity investments977.5 1,046.3 
Maturities and mandatory calls of fixed maturity investments410.3 292.2 
Sales of equity securities18.2 66.3 
Sales of other investments95.5 67.7 
Purchases of fixed maturity investments(1,659.3)(1,535.0)
Purchases of equity securities(68.3)(49.9)
Purchases of other investments(24.5)(54.6)
Change in foreign regulatory deposits and voluntary pools(0.5)2.3 
Change in short-term investments297.8  
Settlements of foreign currency exchange forward contracts9.1 (1.2)
Proceeds from sale of Trident assets38.0  
Purchases of fixed assets(15.8)(22.9)
Other, net2.7 29.6 
Cash provided by (used in) investing activities80.7 (159.2)
Cash flows from financing activities:
Payment of long-term debt(125.0)(0.6)
Issuance of preferred shares, net of issuance costs144.0  
Activity under stock incentive plans 1.4 1.4 
Payment of cash dividends to preferred shareholders(2.0) 
Payment of cash dividends to common shareholders(32.2)(32.5)
Cash used in financing activities(13.8)(31.7)
Effect of exchange rate changes on cash(5.7)1.1 
Change in cash 162.6 5.9 
Cash, beginning of year137.8 139.2 
Cash, end of period$300.4 $145.1 

 See accompanying notes.
8

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.    Basis of Presentation
The accompanying consolidated financial statements of Argo Group International Holdings, Ltd. (“Argo Group,” “we” or the “Company”) and its subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Argo Group is an underwriter of specialty insurance and reinsurance products in the property and casualty market.
The preparation of interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The major estimates reflected in our consolidated financial statements include, but are not limited to, reserves for losses and loss adjustment expenses; reinsurance recoverables, including the reinsurance recoverables allowance for expected credit losses; estimates of written and earned premiums; reinsurance premium receivable; fair value of investments and assessment of potential impairment, including the allowance for credit losses on fixed maturity securities; valuation of goodwill and intangibles and our deferred tax asset valuation allowance. Actual results could differ from those estimates. Certain financial information that normally is included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission ("SEC") on February 28, 2020.
The interim financial information as of, and for the three and nine months ended, September 30, 2020 and 2019 is unaudited. However, in the opinion of management, the interim information includes all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results presented for the interim periods. The operating results for the interim periods are not necessarily indicative of the results to be expected for the full year. All significant intercompany amounts have been eliminated in consolidation. Certain reclassifications have been made to financial information presented for prior years to conform to the current year’s presentation.
During the first nine months of both 2020 and 2019, we incurred non-recurring costs associated with a number of activities that began with proxy solicitation efforts and shareholder engagement. For the three and nine months ended September 30, 2019, these costs were $3.7 million and $11.7 million, respectively, and were previously included in the line item "Underwriting, Acquisition and Insurance Expenses" in the Consolidated Statements of Income in our Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2019. To conform to the current year's presentation, these amounts have been reclassified out of "Underwriting, acquisition and insurance expenses" and into "Other corporate expenses" in the Consolidated Statements of (Loss) Income herein. Please see Note 12, "Underwriting, Acquisition and Insurance Expenses & Other Corporate Expenses" for further discussion.
Sale of Trident Brand and Platform
On April 30, 2020, we sold our Trident Public Risk Solutions (“Trident”) brand and underwriting platform to Paragon Insurance Holdings, LLC (“Paragon”) and received $38 million in cash, with additional consideration in future periods depending on performance post-closing. We recognized a pre-tax gain of $32.3 million related to the sale, which is included in "Net realized investment gains (losses)" in our Consolidated Statements of (Loss) Income for the nine months ended September 30, 2020. Trident was one of the business units within our U.S. Operations reporting segment.
Paragon will continue to write business on Argo paper through a managing general agency agreement, and we will retain Trident’s claims operations and provide claims services to Paragon for the public entity business.
9

Acquisition of Ariel Indemnity Limited
Effective June 12, 2020, Argo Group and our subsidiary Argo Re, Ltd. (“Argo Re”) acquired 100% of the capital stock of Ariel Indemnity Limited (“AIL”) for consideration of $55.6 million. The acquisition of AIL was made pursuant to the former owners (the “Sellers”) of Maybrooke Holdings, S.A. (“Maybrooke”) exercising a put option within the Administrative Services Agreement (“ASA”) between the Company and the Sellers. The ASA was part of the stock purchase agreement between the Company and the Sellers related to our February 6, 2017 acquisition of Maybrooke, the since-liquidated holding company of our Ariel Re platform. The $55.6 million sales price is equal to the 2019 year-end tangible net worth of the AIL, less certain administrative costs. Upon acquiring AIL, we dissolved AIL and merged it into Argo Re.
The net assets of AIL are primarily comprised of certain invested assets and receivables, as well as run-off reserves associated with a loss portfolio transfer agreement between AIL and the former Ariel Reinsurance Company, Ltd. ("ARL") legal entity. ARL was merged into Argo Re in December 2017.
The acquisition is being accounted for in accordance with ASC 805, “Business Combinations.” Purchase accounting, as defined by ASC 805, requires that the assets acquired, and liabilities assumed be recognized at their fair values as of the acquisition date. We are in the process of finalizing our determination of fair values and, as such, provisional fair value amounts for AIL have been recorded for the three and nine months ended September 30, 2020. Based on our initial purchase price allocation, we do not believe that any intangible assets, including goodwill, will be material. We anticipate closing the fair value measurement period by the end of 2020. AIL’s financial position, results of operations and cash flows were not material to our consolidated financial results as of and for the three and nine months ended September 30, 2020.
Risks and Uncertainties
Certain risks and uncertainties are inherent to our day-to-day operations. Adverse changes in the economy could lower demand for our insurance products or negatively impact our investment results, both of which could have an adverse effect on the revenue and profitability of our operations. The global COVID-19 pandemic has resulted in and is expected to continue to result in significant disruptions in economic activity and financial markets. The cumulative effects of COVID-19 on the Company, and the effect of any other public health outbreak, cannot be predicted at this time, but could reduce demand for our insurance policies, result in increased level of losses, settlement expenses or other operating costs, reduce the market value of invested assets held by the Company or negatively impact the fair value of our goodwill. Our liquidity and capital resources were not materially impacted by COVID-19 and related economic conditions during the first nine months of 2020.
2.    Recently Issued Accounting Pronouncements & Updates to Accounting Policies
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, “Measurement of Credit Losses on Financial Instruments” (Topic 326), commonly referred to as current expected credit losses or "CECL." ASU 2016-13 requires organizations to estimate credit losses on certain types of financial instruments, including receivables and available-for-sale debt securities, by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. The updated guidance also amends the previous other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within the year of adoption. The guidance requires a modified retrospective transition method.
We adopted the updated guidance effective January 1, 2020 using the modified retrospective approach, which resulted in a $7.9 million net of tax reduction to retained earnings. Partially offsetting this reduction of retained earnings was a $5.7 million net of tax increase in other comprehensive income representing the reclassification of unrealized investment losses to credit losses under this accounting update. The cumulative effect adjustment decreased shareholders’ equity $2.2 million. Please see Note 3, “Investments” and Note 4, “Allowance for Credit Losses” for further discussion of the impact of ASU 2016-13 on our financial position and results of operations at and for the three and nine months ended September 30, 2020.
10

Updates to Accounting Policies
The following accounting policies have been updated to reflect the adoption of ASU 2016-13, as described above.
Investment Impairments of Available-for-Sale Fixed Maturities
We regularly review our investments to identify and evaluate those that may have credit impairments. For fixed maturity securities, the evaluation for credit losses is generally based on the present value of expected cash flows of the security as compared to the amortized book value, the financial condition, near-term and long-term prospects for the issuer, including industry conditions, implications of rating agency actions, the likelihood of principal and interest recoverability and whether it is more likely than not we will be required to sell the investment prior to the anticipated recovery in value.
Effective January 1, 2020 with the adoption of ASU 2016-13 Financial Instruments-Credit Losses, we recognize credit losses on fixed maturities through an allowance account. For fixed maturities that we do not intend to sell or for which it is more likely than not we will not be required to sell prior to the anticipated recovery in value, we separate the credit component of the impairment from the component related to all other market factors and report the credit loss component to net realized investment gains (losses) in the Consolidated Statement of Income. The impairment related to all other market factors is reported as a separate component of shareholder’s equity in other comprehensive income (loss). The credit loss allowance account is adjusted for any additional credit losses or subsequent recoveries and the cost basis of the fixed maturity security is not adjusted.
For fixed maturity securities that we intend to sell or for which it is more likely than not that we will be required to sell before an anticipated recovery in value, the full amount of the impairment is recognized in net realized investment gains (losses) in the Consolidated Statement of Income and the cost basis of the fixed maturity security is adjusted to reflect the recognized realized loss. The new cost basis is not adjusted for any recoveries in fair value.
We report accrued investment income separately from fixed maturity securities and have elected to not measure an allowance for credit losses for accrued investment income. The write-off of investment income accrued for fixed maturities that have defaulted on interest payments is recognized as a loss in net realized investment gains (losses), in the period of the default, in the Consolidated Statement of Income.