The following is a discussion and analysis of the Company's results of operations for the three and six months ended June 30, 2009 compared with the three and six months ended June 30, 2008, and also a discussion of the Company's financial condition as of June 30, 2009. This discussion and analysis should be read in conjunction with the attached unaudited interim Consolidated Financial Statements and notes thereto and Argo Group's Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission on March 2, 2009, including the audited Consolidated Financial Statements and notes thereto.

Forward Looking Statements

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

Results of Operations

The following is a comparison of selected data from the Company's operations:



                                                        Three Months Ended             Six Months Ended
                                                             June 30,                      June 30,
(in millions)                                          2009            2008           2009           2008
Gross written premiums                               $   572.0        $ 397.6       $ 1,068.1       $ 744.2

Earned premiums                                      $   372.2        $ 261.9       $   715.6       $ 480.6
Net investment income                                     41.9           36.5            81.2          74.6
Fee income                                                 2.1            2.0             2.3           2.0
Realized investment and other gains (losses), net         (9.2 )         (1.2 )         (21.0 )         0.1

Total revenue                                        $   407.0        $ 299.2       $   778.1       $ 557.3

Income before income taxes                                22.5           29.6            53.9          70.9
Provision for income taxes                                 0.6            6.6             5.0          11.0

Net income                                           $    21.9        $  23.0       $    48.9       $  59.9

Loss ratio                                                62.6 %         62.9 %          61.0 %        61.6 %
Expense ratio                                             33.2 %         36.4 %          35.0 %        36.1 %

Combined ratio                                            95.8 %         99.3 %          96.0 %        97.7 %

The increase in consolidated gross written and earned premiums for the three and six months ended June 30, 2009 as compared to the same periods in 2008 was primarily attributable to the operations of Argo Re and Argo International (acquired effective May 31, 2008), in addition to premium growth in the public entity products written in the Commercial Specialty segment. Earned premiums resulting from Argo International were $125.2 million and

$225.2 million for the three and six months ended June 30, 2009, respectively, compared to $31.3 million for the 30 days ended June 30, 2008. Earned premiums resulting from Argo Re were $19.0 million and $34.4 million for the three and six months ended June 30, 2009, respectively, compared to $11.2 million and $18.7 million for the same periods in 2008. Earned premiums within the Commercial Specialty segment increased to $91.5 million and $184.0 million for the three and six months ended June 30, 2009, respectively, compared to $86.3 million and $168.4 million for the same periods in 2008. Most of the Company's product lines have experienced increased competition and/or reduced rates during 2009, with the exception of Argo Re where property catastrophe pricing has increased relative to 2008.

Consolidated net investment income increased for the three and six months ended June 30, 2009 as compared to the same periods in 2008 due to higher invested asset balances resulting from positive cash flows from operations. Additionally, included in consolidated net investment income for the three and six months ended June 30, 2009 was $4.5 million in interest received from the state of California related to a tax settlement. Total invested assets at June 30, 2009 and 2008 were $3,833.7 million and $3,706.4 million, respectively; net of $243.4 million and $225.8 million of invested assets attributable to Argo International's trade capital providers.

Consolidated fee income represents commissions and other fees earned by the Company for the non-risk bearing activities. Fee income is generated by the Commercial Specialty segment as a result of business placed with other insurance companies. In addition, the International Specialty segment generates fee income and profit commission from managing third party capital for certain syndicates at Lloyds. Consolidated fee income was $2.1 million and $2.3 million for the three and six months ended June 30, 2009, compared to $2.0 million for each of the same periods ended 2008.

Consolidated realized investment and other losses, net, for the three months ended June 30, 2009 were $9.2 million compared to $1.2 million for the same period ended 2008. Consolidated realized investment and other losses, net, for the six months ended June 30, 2009 was $21.0 million compared to a realized gain of $0.1 million for the same period ended 2008. Included in realized investment losses for the three and six months ended June 30, 2009 were $7.7 million and $21.8 million, respectively, of realized loss due to the recognition of other-than-temporary impairments, compared to $2.3 million and $8.9 million for the same periods ended 2008. The Company regularly evaluates its investment portfolio for indications of other-than-temporary impairments to its holdings. If individual securities are determined to have an other-than-temporary impairment, the security is written down to its fair value. Included in consolidated realized gains for the six months ended June 30, 2008 was a realized gain on the sale of PXRE Reinsurance Company of $2.3 million, primarily attributable to the increase in the value of the fixed maturity portfolio, coupled with realized gains from the sale of primarily equity securities totaling $5.7 million, both which occurred in the first quarter of 2008.

Consolidated losses and loss adjustment expenses were $233.1 million and $436.3 million for the three and six months ended June 30, 2009, respectively, compared to $164.7 million and $296.3 million for the same period ended 2008. The consolidated loss ratio for the three and six months ended June 30, 2009 were 62.6% and 61.0%, respectively, compared to 62.9% and 61.6% for the same periods in 2008. Included in losses and loss adjustment expenses for the six months ended June 30, 2009 was $13.9 million in net unfavorable loss reserve development on prior accident years. The following table summarizes the reserve development as respects to prior year loss reserves by line of business for the quarter ended June 30, 2009:

                               Net Reserves at                        Percent of Net
                                December 31,       Net Reserve         Reserves by
  (in millions)                     2008           Development       Line of Business
  General liability           $           909.9   $        (2.1 )                -0.2 %
  Workers compensation                    465.4             0.8                   0.2 %
  Commercial multi-peril                  190.2             1.1                   0.6 %
  Commercial auto liability               145.7             5.3                   3.6 %
  Special property                         19.0             1.1                   5.8 %
  Auto physical damage                     10.0            (3.9 )               -39.0 %
  Argo International                      239.5            22.2                   9.3 %
  Argo Re                                  30.0            (4.4 )               -14.7 %
  PXRE Legacy                              97.6            (5.8 )                -5.9 %
  All other lines                           8.3            (0.4 )                -4.8 %

  Total all lines             $         2,115.6   $        13.9                   0.7 %

The net unfavorable development as related to total net reserves for losses and loss adjustment expenses as of December 31, 2008 represents $13.9 million or less than 1.0% of total reserves outstanding at December 31, 2008. The favorable development in the auto physical damage line of business resulted from better than expected loss frequency and severity. The unfavorable reserve development for the commercial auto liability line was primarily attributable to increased frequency and severity. The general liability line of business had $2.1 million favorable prior accident year loss development primarily within the Excess and Surplus lines segment, partially offset by the strengthening of reserves for certain asbestos and environmental claims. The revised reserve estimates for the Argo International net loss reserves developed unfavorably by $22.2 million within the property binder book of business written in 2008. The unfavorable development recognized related to Argo International was partially offset by $17.2 million of additional estimated ultimate premium within the same property binder book of business. The revised estimate for the PXRE Legacy net loss reserves developed favorably by $5.8 million, with $1.7 million representing a reforecast of the 2005 hurricane losses. Argo Re reserves had favorable development of $4.4 million, with $1.7 million representing a reforecast of Hurricane Ike losses.

In determining appropriate reserve levels as of June 30, 2009, the Company maintained the same general processes and disciplines that were used to set reserves at prior reporting dates. No changes in key assumptions were made to estimate the reserves since the last reporting date; however, the maturation of claims since the last analysis provided a basis to assign greater credibility to emerged loss development patterns. Consistent with prior reserve valuations, actuarial estimates were refined to assign alternate weights to the different loss forecasting methodologies in order to respond to any emerging trends in the paid and reported loss data. These modifications to the analysis varied depending on whether the line of business was short-tailed or long-tailed and also varied by accident year.

When determining reserve levels, the Company recognizes that there are several factors that present challenges and uncertainties to the estimation of loss reserves. Examples of these uncertainties include growth over the last several years in both the Excess and Surplus Lines and Commercial Specialty segments, and changes to the reinsurance structure. The Company's net retained losses vary by product and they have generally increased over time. To properly recognize these uncertainties, both internal and independent actuarial reviews relied, to a large extent on the paid and incurred Bornhuetter-Ferguson methodologies, which generally produce higher projections of ultimate losses

than the other methods. Compared with other actuarial methodologies, the paid and incurred Bornhuetter-Ferguson methods assigned the smallest weight to actual reported loss experience, with the greatest weighting assigned to an expected or planned loss ratio. The expected or planned loss ratio has typically been determined using various assumptions pertaining to prospective loss frequency and loss severity. In setting reserves at June 30, 2009, the Company continued to rely most heavily on the paid and incurred Bornhuetter-Ferguson methods; however certain additional weighting was assigned to other actuarial methods to recognize the most current trends emerging in paid and reported loss data.

Another factor that was considered in setting loss reserves at June 30, 2009 was the impact of the Company's reinsurance protection. The Company's excess of loss reinsurance coverage has varied by product. For most general liability products, the net per occurrence retention increased from $250,000 to $500,000 on September 1, 2002 and then to $1,000,000 on October 1, 2006. When loss reserves were initially established, the Company expected a greater number of large claims in the $250,000 excess of $250,000 layer of coverage. In 2006 and again in 2007, after a review of reported large loss activity, the Company began to recognize that the increased retention in the $250,000 excess of $250,000 layer did not have as material an impact on net retained losses as had originally been contemplated. Furthermore, the decision to increase net retentions had a favorable effect on net loss ratios.

For general liability business, the Company increased its premium volume significantly from 2002 through 2006. This growth occurred in both the Excess and Surplus Lines and Commercial Specialty segments. The premium increases derived from both organic growth and acquisitions. In setting loss reserves, internal and external actuaries assumed that the new business may not perform as well as renewal business and that prior year loss development patterns may not be representative of future loss emergence. The actuarial assumption that new business may not perform as well as renewal business is primarily predicated on the basis that the new insurance company offers a lower price or better terms and conditions than the incumbent carrier. Further, the incumbent carrier has the benefit of historical experience and loss characteristics of the insured. Thus, the actuarial methods utilizing the assumption that new business would generate a higher loss ratio were assigned more weight. The Company's loss reserve estimates gradually blend in the results from other methodologies over time. For general liability estimates, more credibility is assigned to the Company's own loss experience approximately 60 to 72 months after the beginning of an accident year. Over the course of time, the Company has recognized that the new business growth from 2002 through 2006 exhibited similar underwriting and profitability characteristics as the Company's renewal book. Further review and analysis of the data in the second quarter of 2009 suggested that favorable loss experience on the new business growth continued to emerge in the second quarter of 2009. Thus the Company reduced its ultimate loss estimates for general liability lines of business for the 2006 and prior accident years.

For property business, the Company's loss reserve estimates also blend in the results from other actuarial methodologies over time. In contrast to general liability estimates, more credibility is assigned to the Company's loss experience approximately 24 to 36 months after the beginning of an accident year, where loss reporting and claims closing patterns settle more quickly. The Company's loss experience receives partial weighting in the estimates 12 to 24 months after the beginning of the accident year. As respects to the loss reserves related to PXRE, the nature of reinsurance (including retro business) requires a longer maturation period. As such, the Company recognized favorable loss experience for the 2005 and 2006 accident years in 2007. Likewise, during 2008 and 2009, the Company recognized favorable loss experience deriving from the 2006 and 2007 accident years.

While prior accident years' net reserves for losses and loss adjustment expenses for some lines of business have developed favorably during 2007 and 2008, this does not infer that more recent accident years' reserves also will develop favorably; pricing, reinsurance costs, the legal environment, general economic conditions and many other factors impact management's ultimate loss estimates. For accident years 2007 and 2008, pricing for our products was under significant competition and management's expectation is that profitability for certain lines of business decreased accordingly as loss costs have not decreased proportionately.

Consolidated loss reserves were $3,165.2 million (including $224.9 million of reserves attributable to trade capital providers) and $2,898.8 million
(including $191.9 million of reserves attributable to trade capital providers)
as of June 30, 2009 and 2008, respectively. Management has recorded its best estimate of loss reserves as of June 30, 2009 based on current known facts and circumstances. Due to the significant uncertainties inherent in the estimation of loss reserves, there can be no assurance that future loss development, favorable or unfavorable, will not occur.

Consolidated underwriting, insurance and acquisition expenses were $123.5 million and $250.8 million for the three and six months ended June 30, 2009, respectively, compared to $95.4 million and $173.6 million for the same periods in 2008. Consolidated expense ratios declined to 33.2% and 35.0% for the three and six months ended June 30, 2009, respectively, compared to 36.4% and 36.1% for the same periods in 2008. The higher expense ratios for 2008 were primarily attributable to increased expenses related to the Argo International acquisition and the start up of Argo Re.

Consolidated interest expense and other were $9.2 million and $18.3 million for the three and six months ended June 30, 2009, respectively, compared to $9.2 million and $16.5 million for the same periods in 2008. Consolidated interest expense declined from $7.1 million and $14.2 million for the three and six months ended June 30, 2008, respectively, to $6.7 million and $13.7 million for the same periods in 2009. The decline in interest expense was the result of more favorable interest rates on the Company's outstanding debt reflecting current market conditions. Included in consolidated interest expense and other for the three and six months ended June 30, 2009 was $2.5 million and $4.6 million, respectively, in expense related to the generation of fee income within the Commercial Specialty and International Specialty segments, compared to $2.0 million for the same three and six month periods ended 2008.

Consolidated foreign currency exchange loss on transactions that are settled in currencies other than U.S. Dollars was $12.8 million for the three months ended June 30, 2009. The loss was primarily attributable to the weakening of the U.S. Dollar against the British Pound, the Canadian Dollar and the Euro for business transacted at Argo International.

In June 2009, the Company deemed the value assigned to the trade name of Heritage impaired after an evaluation of the value of the name in the Lloyds market undertaken by the Company and the subsequent renaming of Heritage to Argo International. The expense recognized as a result of this impairment was $5.9 million, which represented the unamortized balance as of the impairment date.

Consolidated provisions for income taxes were $0.6 million and $6.6 million for the three months ended June 30, 2009 and 2008, respectively. The Company's effective tax rate for the three months ended June 30, 2009 and 2008 were 2.6% and 22.4%, respectively. Consolidated provisions for income taxes were $5.0 million and $11.0 million for the six months ended June 30, 2009 and 2008, respectively. The Company's effective tax rate for the six months ended June 30, 2009 and 2008 were 9.2% and 15.5%, respectively. Included in the consolidated provision for income taxes for the three and six months ended June 30, 2009 was a $5.6 million tax refund received from the state of California due to a favorable tax settlement. Offsetting this tax refund was $5.0 million in tax expense from Argo Financial Holding (Ireland) Ltd to the Internal Revenue Service for withholding on dividends received from Argo Group US. The Company's effective tax rate is subject to variability depending on the income produced in the jurisdictions in which the Company operates.

Segment Results

The Company is primarily engaged in writing property and casualty insurance and reinsurance. The Company has four ongoing reporting segments: Excess and Surplus Lines, Commercial Specialty, Reinsurance and International Specialty. Additionally, the Company has a Run-off Lines segment for products that it no longer writes.

In evaluating the operating performance of its segments, the Company focuses on core underwriting and investing results before consideration of realized gains or losses from the sales of investments. Management excludes realized investment gains and losses from segment results, as decisions regarding the sales of investments are made at the

corporate level. Although this measure of profit (loss) does not replace net income (loss) computed in accordance with GAAP as a measure of profitability, management utilizes this measure of profit (loss) to focus its reporting segments on generating operating income.

Excess and Surplus Lines. The following table summarizes the results of operations for the Excess and Surplus Lines segment for the three and six months ended June 30, 2009 and 2008:

                                                      Three Months Ended             Six Months Ended
                                                           June 30,                      June 30,
(in millions)                                        2009            2008           2009          2008
Gross written premiums                             $   176.0        $ 180.3       $  322.1       $ 340.4

Earned premiums                                    $   133.1        $ 132.6       $  265.5       $ 261.1
Losses and loss adjustment expenses                     82.1           84.3          161.8         158.5
Underwriting, acquisition and insurance expense         42.6           43.1           89.0          86.1

Underwriting income                                      8.4            5.2           14.7          16.5
Net investment income                                   16.8           15.2           34.5          30.8

Income before income taxes                         $    25.2        $  20.4       $   49.2       $  47.3

Loss ratio                                              61.7 %         63.6 %         60.9 %        60.7 %
Expense ratio                                           32.0 %         32.5 %         33.5 %        33.0 %

Combined ratio                                          93.7 %         96.1 %         94.4 %        93.7 %

Earned premiums were comparable for the three months ended June 30, 2009 as compared to the same period in 2008. The excess and surplus lines market place continues to experience increased competition, from both other excess and surplus lines carriers as well as the standard markets, which has led to lower rates and business shifting to the standard markets. Pricing in the Excess and Surplus Lines segment has declined moderately for the three and six months ended June 30, 2009 as compared to the same periods in 2008. Additionally, the Excess and Surplus Lines segment has experienced a shift in both product and policyholder mix, resulting in reduced premium writings.

The Excess and Surplus Lines segment's loss ratios for the three months ended June 30, 2009 and 2008 were 61.7% and 63.6%, respectively. Included in losses and loss adjustment expenses for the three months ended June 30, 2009 was $5.0 million in favorable development on prior year loss reserves within the casualty, professional liability and property lines. Losses and loss adjustment expenses for the three months ended June 30, 2008 included $6.1 million of losses for the 2008 accident year related to storm activity in the United States. Partially offsetting these losses was $5.0 million of favorable loss reserve development for prior accident years primarily driven by property lines for the 2007 accident year.

Losses and loss adjustment expenses for the six months ended June 30, 2009 and 2008 resulted in loss ratios of 60.9% and 60.7%, respectively. Included in losses and loss adjustment expenses for the six months ended June 30, 2009 was $9.4 million in favorable loss reserve development on prior accident years within the casualty, professional liability and property lines, reduced by $1.1 million of unfavorable loss reserve development on prior accident years due to the settlement of a large claim. Losses and loss adjustment expenses for the six months ended June 30, 2008 include the activity related to the 2008 accident year discussed above, offset by favorable development on prior accident years of $10.1 million, primarily driven by property lines for the 2007 accident year and other liability lines related to accident years 2001 through 2004. Loss reserves for the Excess and Surplus Lines segment were $1,302.6 million and $1,176.1 million as of June 30, 2009 and 2008, respectively.

Underwriting, insurance and acquisition expenses for the three months ended June 30, 2009 and 2008 resulted in expense ratios of 32.0% and 32.5%, respectively. The decline in the expense ratio was primarily attributable to reduced non-acquisition general and administrative expenses. The expense ratio for the six months ended June 30, 2009 was 33.5% compared to 33.0% for the same period in 2008. The increase in the expense ratio in 2009 as compared to 2008 was attributable to increased expenses in the first quarter of 2009 associated with a 2008 acquisition.

The increase in investment income for the three and six months ended June 30, 2009, as compared to the same periods in 2008, was primarily the result of an increase in invested assets due to positive cash flows. Invested assets were $1,617.3 million as of June 30, 2009, compared to $1,482.2 million as of June 30, 2008.

Commercial Specialty. The following table summarizes the results of operations for the Commercial Specialty segment for the three and six months ended June 30, 2009 and 2008:

                                                      Three Months Ended             Six Months Ended
. . .