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

Forward Looking Statements

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

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

Results of Operations

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



                                        Three Months Ended            Nine Months Ended
                                           September 30,                September 30,
  (in millions)                         2012           2011          2012           2011
  Gross written premiums              $   485.5       $ 448.5      $ 1,356.0      $ 1,203.0

  Earned premiums                     $   304.3       $ 270.9      $   871.8      $   804.0
  Net investment income                    28.9          30.0           90.3           96.3
  Fee income, net                           3.0           1.4            4.8            1.8
  Net realized investment gains             8.3           3.9           18.7           37.7

  Total revenue                       $   344.5       $ 306.2      $   985.6      $   939.8

  Income (loss) before income taxes   $    17.7       $  (4.0 )    $    70.8      $   (70.0 )
  Provision for income taxes                4.3           6.8           13.8           13.3

  Net income (loss)                   $    13.4       $ (10.8 )    $    57.0      $   (83.3 )

  Loss ratio                               62.6 %        74.5 %         62.0 %         83.0 %
  Expense ratio                            39.7 %        38.8 %         40.7 %         39.3 %

  Combined ratio                          102.3 %       113.3 %        102.7 %        122.3 %

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

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

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

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

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

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

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

Total                                              $ 2,336.7       $       (17.8 )             -0.8 %

In determining appropriate reserve levels for the nine months ended September 30, 2012, we maintained the same general processes and disciplines that were used to set reserves at prior reporting dates. No significant changes in methodologies were made to estimate the reserves since the last reporting date; however, at each reporting date we reassess the actuarial estimate of the reserve for losses and loss adjustment expenses and record our best estimate. Consistent with prior reserve valuations, as claims data becomes more mature for prior accident years, actuarial estimates were refined to weigh certain actuarial methods more heavily in order to respond to any emerging trends in the paid and reported loss data. These modifications to the analysis varied depending on whether the line of business was short-tailed or long-tailed and also varied by accident year. While prior accident years' net reserves for losses and loss adjustment expenses for some lines of business have developed favorably in recent years, this does not infer that more recent accident years' reserves also will develop favorably; pricing, reinsurance costs, the legal environment, general economic conditions including changes in inflation and many other factors impact our ultimate loss estimates. Since accident year 2007, pricing for our products has been under significant competition and management's expectation is that profitability for certain lines of business decreased accordingly yet loss costs have not decreased proportionately.

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

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

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

Consolidated loss reserves were $3,227.9 million (including $172.7 million of reserves attributable to the Syndicate 1200 segment's trade capital providers) and $3,349.6 million (including $197.9 million of reserves attributable to the Syndicate 1200 segment's trade capital providers) as of September 30, 2012 and 2011, respectively. Management has recorded its best estimate of loss reserves as of September 30, 2012 based on current known facts and circumstances. Due to the significant uncertainties inherent in the estimation of loss reserves, there can be no assurance that future loss development, favorable or unfavorable, will not occur.

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

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

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

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

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

Segment Results

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

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

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

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

                                                       Three Months Ended             Nine Months Ended
                                                         September 30,                  September 30,
(in millions)                                         2012            2011           2012           2011
Gross written premiums                              $   131.7        $ 117.0       $   382.9       $ 357.3

Earned premiums                                     $   100.8        $  99.5       $   295.5       $ 305.8
Losses and loss adjustment expenses                      60.0           54.6           164.8         194.6
Underwriting, acquisition and insurance expenses         35.9           35.1           106.3         106.2

Underwriting income                                       4.9            9.8            24.4           5.0
Net investment income                                    12.5           13.4            38.5          42.8
Interest expense                                         (2.3 )         (2.1 )          (6.6 )        (6.2 )

Income before income taxes                          $    15.1        $  21.1       $    56.3       $  41.6

Loss ratio                                               59.5 %         55.0 %          55.7 %        63.7 %
Expense ratio                                            35.5 %         35.3 %          36.0 %        34.7 %

Combined ratio                                           95.0 %         90.3 %          91.7 %        98.4 %

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

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

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

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

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

                                                       Three Months Ended             Nine Months Ended
                                                         September 30,                  September 30,
. . .