UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2013
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: 001-32938
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
(Exact Name of Registrant as Specified in Its Charter)
Switzerland | 98-0681223 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) |
Lindenstrasse 8
6340 Baar
Zug, Switzerland
(Address of Principal Executive Offices and Zip Code)
41-41-768-1080
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer ¨ |
Non-accelerated filer ¨ | Smaller reporting company ¨ |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of October 14, 2013, 33,761,646 common shares were outstanding.
PART I |
FINANCIAL INFORMATION | |||||
Item 1. |
Financial Statements | 1 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 28 | ||||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 63 | ||||
Item 4. |
Controls and Procedures | 66 | ||||
PART II |
OTHER INFORMATION | |||||
Item 1. |
Legal Proceedings | 67 | ||||
Item 1A. |
Risk Factors | 67 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 67 | ||||
Item 3. |
Defaults Upon Senior Securities | 68 | ||||
Item 4. |
Mine Safety Disclosures | 68 | ||||
Item 5. |
Other Information | 68 | ||||
Item 6. |
Exhibits | 68 | ||||
69 | ||||||
-i-
FINANCIAL INFORMATION
Item 1. | Financial Statements. |
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
as of September 30, 2013 and December 31, 2012
(Expressed in thousands, except share and per share amounts)
As of September 30, 2013 |
As of December 31, 2012 |
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ASSETS: |
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Fixed maturity investments trading, at fair value (amortized cost: 2013: $5,996,065; 2012: $6,473,429) |
$ | 6,047,883 | $ | 6,626,454 | ||||
Equity securities trading, at fair value (cost: 2013: $679,228; 2012: $480,312) |
708,929 | 523,949 | ||||||
Other invested assets |
905,025 | 783,534 | ||||||
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Total investments |
7,661,837 | 7,933,937 | ||||||
Cash and cash equivalents |
953,047 | 681,879 | ||||||
Restricted cash |
257,517 | 183,485 | ||||||
Insurance balances receivable |
740,112 | 510,532 | ||||||
Funds held |
375,131 | 336,368 | ||||||
Prepaid reinsurance |
327,052 | 277,406 | ||||||
Reinsurance recoverable |
1,226,034 | 1,141,110 | ||||||
Accrued investment income |
25,471 | 29,135 | ||||||
Net deferred acquisition costs |
145,951 | 108,010 | ||||||
Goodwill |
268,376 | 268,376 | ||||||
Intangible assets |
49,464 | 51,365 | ||||||
Balances receivable on sale of investments |
237,031 | 418,879 | ||||||
Net deferred tax assets |
41,832 | 25,580 | ||||||
Other assets |
68,665 | 63,884 | ||||||
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Total assets |
$ | 12,377,520 | $ | 12,029,946 | ||||
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LIABILITIES: |
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Reserve for losses and loss expenses |
$ | 5,780,781 | $ | 5,645,549 | ||||
Unearned premiums |
1,515,746 | 1,218,021 | ||||||
Reinsurance balances payable |
193,643 | 136,264 | ||||||
Balances due on purchases of investments |
497,974 | 759,934 | ||||||
Senior notes |
798,426 | 798,215 | ||||||
Dividends payable |
16,952 | | ||||||
Accounts payable and accrued liabilities |
130,070 | 145,628 | ||||||
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Total liabilities |
$ | 8,933,592 | $ | 8,703,611 | ||||
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Commitments and contingencies |
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SHAREHOLDERS EQUITY: |
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Common shares: 2013: par value CHF 12.30 per share and 2012: par value CHF 12.64 per share (2013: 34,972,795; 2012: 36,369,868 shares issued and 2013: 33,814,920; 2012: 34,797,781 shares outstanding) |
424,837 | 454,980 | ||||||
Treasury shares, at cost (2013: 1,157,875; 2012: 1,572,087) |
(85,845) | (113,818) | ||||||
Retained earnings |
3,104,936 | 2,985,173 | ||||||
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Total shareholders equity |
3,443,928 | 3,326,335 | ||||||
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Total liabilities and shareholders equity |
$ | 12,377,520 | $ | 12,029,946 | ||||
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See accompanying notes to the consolidated financial statements.
1
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
for the three and nine months ended September 30, 2013 and 2012
(Expressed in thousands, except share and per share amounts)
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2013 | 2012 | 2013 | 2012 | |||||||||||||
REVENUES: |
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Gross premiums written |
$ | 580,893 | $ | 504,420 | $ | 2,183,174 | $ | 1,832,219 | ||||||||
Premiums ceded |
(127,816) | (112,883) | (453,823) | (357,019) | ||||||||||||
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Net premiums written |
453,077 | 391,537 | 1,729,351 | 1,475,200 | ||||||||||||
Change in unearned premiums |
57,696 | 49,480 | (248,079) | (202,546) | ||||||||||||
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Net premiums earned |
510,773 | 441,017 | 1,481,272 | 1,272,654 | ||||||||||||
Net investment income |
39,271 | 39,121 | 110,294 | 128,781 | ||||||||||||
Net realized investment gains (losses) |
27,487 | 149,813 | (8,074) | 292,057 | ||||||||||||
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577,531 | 629,951 | 1,583,492 | 1,693,492 | |||||||||||||
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EXPENSES: |
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Net losses and loss expenses |
276,970 | 258,948 | 807,276 | 724,530 | ||||||||||||
Acquisition costs |
65,114 | 51,086 | 186,416 | 149,812 | ||||||||||||
General and administrative expenses |
88,553 | 78,572 | 251,818 | 222,917 | ||||||||||||
Amortization of intangible assets |
633 | 633 | 1,900 | 1,900 | ||||||||||||
Interest expense |
14,094 | 13,822 | 42,416 | 41,579 | ||||||||||||
Foreign exchange loss (gain) |
4,353 | 1,023 | 7,361 | (77) | ||||||||||||
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449,717 | 404,084 | 1,297,187 | 1,140,661 | |||||||||||||
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Income before income taxes |
127,814 | 225,867 | 286,305 | 552,831 | ||||||||||||
Income tax expense |
4,971 | 6,220 | 6,332 | 18,677 | ||||||||||||
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NET INCOME |
122,843 | 219,647 | 279,973 | 534,154 | ||||||||||||
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Other comprehensive loss: |
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Unrealized (losses) gains on investments arising during the period net of applicable deferred income tax benefit (expense) for the three and nine months ended September 30, 2012: $15 and ($81), respectively |
| (29) | | 150 | ||||||||||||
Reclassification adjustment for net realized investment gains included in net income, net of applicable income tax |
| | | (13,249) | ||||||||||||
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Other comprehensive loss |
| (29) | | (13,099) | ||||||||||||
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COMPREHENSIVE INCOME |
$ | 122,843 | $ | 219,618 | $ | 279,973 | $ | 521,055 | ||||||||
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PER SHARE DATA |
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Basic earnings per share |
$ | 3.61 | $ | 6.16 | $ | 8.15 | $ | 14.68 | ||||||||
Diluted earnings per share |
$ | 3.54 | $ | 6.00 | $ | 7.97 | $ | 14.28 | ||||||||
Weighted average common shares outstanding |
33,991,359 | 35,652,768 | 34,340,227 | 36,379,514 | ||||||||||||
Weighted average common shares and common share equivalents outstanding |
34,728,193 | 36,616,734 | 35,131,092 | 37,393,093 | ||||||||||||
Dividends paid per share |
$ | 0.500 | $ | 0.750 | $ | 0.875 | $ | 1.500 |
See accompanying notes to the consolidated financial statements.
2
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
for the nine months ended September 30, 2013 and 2012
(Expressed in thousands)
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Share | Paid-in | Treasury | Comprehensive | Retained | ||||||||||||||||||||
Capital | Capital | Shares | Income | Earnings | Total | |||||||||||||||||||
December 31, 2012 |
$ | 454,980 | $ | | $ | (113,818) | $ | | $ | 2,985,173 | $ | 3,326,335 | ||||||||||||
Net income |
| | | | 279,973 | 279,973 | ||||||||||||||||||
Dividends par value reduction |
(12,981) | | | | | (12,981) | ||||||||||||||||||
Dividends |
| | | | (34,069) | (34,069) | ||||||||||||||||||
Stock compensation (1) |
| | 26,093 | | (18,278) | 7,815 | ||||||||||||||||||
Share repurchases |
| | (123,145) | | | (123,145) | ||||||||||||||||||
Shares cancelled |
(17,162) | | 125,025 | | (107,863) | | ||||||||||||||||||
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September 30, 2013 |
$ | 424,837 | $ | | $ | (85,845) | $ | | $ | 3,104,936 | $ | 3,443,928 | ||||||||||||
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December 31, 2011 |
$ | 557,153 | $ | 78,225 | $ | (136,590) | $ | 14,484 | $ | 2,635,750 | $ | 3,149,022 | ||||||||||||
Net income |
| | | | 534,154 | 534,154 | ||||||||||||||||||
Dividends par value reduction |
(40,419) | | | | | (40,419) | ||||||||||||||||||
Other comprehensive loss |
| | | (13,099) | | (13,099) | ||||||||||||||||||
Stock compensation (1) |
| (23,050) | 36,226 | | | 13,176 | ||||||||||||||||||
Share repurchases |
| | (207,048) | | | (207,048) | ||||||||||||||||||
Shares cancelled |
(39,488) | (55,175) | 186,468 | | (91,805) | | ||||||||||||||||||
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September 30, 2012 |
$ | 477,246 | $ | | $ | (120,944) | $ | 1,385 | $ | 3,078,099 | $ | 3,435,786 | ||||||||||||
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(1) | Includes stock compensation expense for the period and shares issued out of treasury for awards exercised or vested. |
See accompanying notes to the consolidated financial statements.
3
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 2013 and 2012
(Expressed in thousands)
Nine Months Ended September 30, |
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2013 | 2012 | |||||||
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: |
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Net income |
$ | 279,973 | $ | 534,154 | ||||
Adjustments to reconcile net income to cash provided by operating activities: |
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Net realized gains on sales of investments |
(76,104) | (63,625) | ||||||
Mark to market adjustments |
80,136 | (225,425) | ||||||
Stock compensation expense |
9,282 | 13,118 | ||||||
Undistributed income of equity method investments |
(4,313) | | ||||||
Changes in: |
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Reserve for losses and loss expenses, net of reinsurance recoverables |
50,308 | 151,041 | ||||||
Unearned premiums, net of prepaid reinsurance |
248,079 | 202,545 | ||||||
Insurance balances receivable |
(229,580) | (121,422) | ||||||
Funds held |
(38,763) | 18,602 | ||||||
Reinsurance balances payable |
57,379 | (4,107) | ||||||
Net deferred acquisition costs |
(37,941) | (27,193) | ||||||
Net deferred tax assets |
(16,252) | 1,850 | ||||||
Accounts payable and accrued liabilities |
(18,540) | (2,996) | ||||||
Other items, net |
34,508 | 23,677 | ||||||
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Net cash provided by operating activities |
338,172 | 500,219 | ||||||
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CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: |
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Purchases of trading securities |
(4,955,817) | (6,328,719) | ||||||
Purchases of other invested assets |
(211,501) | (52,578) | ||||||
Sales of available for sale securities |
| 215,318 | ||||||
Sales of trading securities |
5,137,280 | 5,778,138 | ||||||
Sales of other invested assets |
189,155 | 110,429 | ||||||
Purchases of fixed assets |
(4,171) | (2,041) | ||||||
Change in restricted cash |
(74,032) | 35,685 | ||||||
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Net cash provided by (used in) investing activities |
80,914 | (243,768) | ||||||
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CASH FLOWS USED IN FINANCING ACTIVITIES: |
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Dividends paid - partial par value reduction |
(12,981) | (54,721) | ||||||
Dividends paid |
(17,117) | | ||||||
Proceeds from the exercise of stock options |
8,465 | 9,104 | ||||||
Share repurchases |
(120,163) | (204,746) | ||||||
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Net cash used in financing activities |
(141,796) | (250,363) | ||||||
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Effect of exchange rate changes on foreign currency cash |
(6,122) | (567) | ||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
271,168 | 5,521 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
681,879 | 633,996 | ||||||
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CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 953,047 | $ | 639,517 | ||||
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Supplemental disclosure of cash flow information: |
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Cash paid for income taxes |
$ | 17,249 | $ | 18,912 | ||||
Cash paid for interest expense |
$ | 45,750 | $ | 45,750 |
See accompanying notes to the consolidated financial statements.
4
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
1. GENERAL
Allied World Assurance Company Holdings, AG, a Swiss holding company (Allied World Switzerland), through its wholly-owned subsidiaries (collectively, the Company), provides property and casualty insurance and reinsurance on a worldwide basis through operations in Bermuda, the United States, Europe, Hong Kong and Singapore. References to $ are to the lawful currency of the United States and to CHF are to the lawful currency of Switzerland.
2. BASIS OF PREPARATION AND CONSOLIDATION
These unaudited condensed consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with Article 10 of Regulation S-X as promulgated by the U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments that are normal and recurring in nature and necessary for a fair presentation of financial position and results of operations as of the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates reflected in the Companys financial statements include, but are not limited to:
| The premium estimates for certain reinsurance agreements, |
| Recoverability of deferred acquisition costs, |
| The reserve for outstanding losses and loss expenses, |
| Valuation of ceded reinsurance recoverables, |
| Determination of impairment of goodwill and other intangible assets, and |
| Valuation of financial instruments. |
Intercompany accounts and transactions have been eliminated on consolidation and all entities meeting consolidation requirements have been included in the unaudited condensed consolidated financial statements. To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the current years presentation.
These unaudited condensed consolidated financial statements, including these notes, should be read in conjunction with the Companys audited consolidated financial statements, and related notes thereto, included in the Companys Annual Report on Form 10-K for the year ended December 31, 2012.
3. NEW ACCOUNTING PRONOUNCEMENTS
In December 2011 (with a clarification amendment issued in January 2013), the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-11, Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). The objective of ASU 2011-11 was to enhance disclosures about derivatives, repurchase agreements and reverse repurchase agreements, securities borrowing and securities lending transactions to the extent they are subject to master netting arrangements or similar agreements. The Company adopted ASU 2011-11 on January 1, 2013. The adoption of ASU 2011-11 did not have an impact on the presentation of the financial statements.
In July 2013, the FASB issued Accounting Standards Update 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (ASU 2013-10). Prior to the issuance of ASU 2013-10, only interest rates on U.S. Treasury securities and the London Interbank Offered Rate (LIBOR) swap rate were considered benchmark interest rates in the application of hedge accounting under U.S. GAAP. ASU 2013-10 permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes in addition to U.S. Treasury securities and LIBOR. ASU 2013-10 was effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. ASU 2013-10 did not have any impact on the financial statements upon adoption, as the Company does not apply hedge accounting.
5
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
4. INVESTMENTS
a) Trading Securities
Securities accounted for at fair value with changes in fair value recognized in the unaudited condensed consolidated statements of operations and comprehensive income (consolidated income statements) by category are as follows:
September 30, 2013 | December 31, 2012 | |||||||||||||||
Fair Value | Amortized Cost | Fair Value | Amortized Cost | |||||||||||||
U.S. Government and Government agencies |
$ | 1,850,335 | $ | 1,851,002 | $ | 1,865,913 | $ | 1,854,198 | ||||||||
Non-U.S. Government and Government agencies |
209,625 | 214,114 | 261,627 | 253,657 | ||||||||||||
States, municipalities and political subdivisions |
95,381 | 95,661 | 40,444 | 39,342 | ||||||||||||
Corporate debt: |
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Financial institutions |
841,930 | 826,763 | 866,140 | 835,587 | ||||||||||||
Industrials |
1,146,793 | 1,140,636 | 1,153,909 | 1,139,706 | ||||||||||||
Utilities |
74,764 | 74,865 | 69,153 | 67,463 | ||||||||||||
Mortgage-backed |
1,373,161 | 1,341,303 | 1,958,373 | 1,877,854 | ||||||||||||
Asset-backed |
455,894 | 451,721 | 410,895 | 405,622 | ||||||||||||
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Total fixed maturity investments |
$ | 6,047,883 | $ | 5,996,065 | $ | 6,626,454 | $ | 6,473,429 | ||||||||
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September 30, 2013 | December 31, 2012 | |||||||||||||||
Fair Value | Original Cost | Fair Value | Original Cost | |||||||||||||
Equity securities |
$ | 708,929 | $ | 679,228 | $ | 523,949 | $ | 480,312 | ||||||||
Other invested assets |
767,071 | 680,986 | 655,888 | 606,521 | ||||||||||||
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$ | 1,476,000 | $ | 1,360,214 | $ | 1,179,837 | $ | 1,086,833 | |||||||||
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Other invested assets, included in the table above, include investments in private equity funds, hedge funds and a high yield loan fund that are accounted for at fair value, but excludes other private securities described below in Note 4(b) that are accounted for using the equity method of accounting.
6
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
b) Other Invested Assets
Details regarding the carrying value, redemption characteristics and unfunded investment commitments of the other invested assets portfolio as of September 30, 2013 were as follows:
Carrying | Investments | Estimated | Investments | |||||||||||||||||||||||
Value as of | with | Remaining | without | Redemption | ||||||||||||||||||||||
September 30, | Redemption | Restriction | Redemption | Redemption | Notice | Unfunded | ||||||||||||||||||||
Fund Type |
2013 | Restrictions | Period | Restrictions(1) | Frequency(1) | Period(1) | Commitments | |||||||||||||||||||
Private equity |
$ | 131,449 | $ | 131,449 | 3 - 10 Years | $ | | $ | 252,571 | |||||||||||||||||
Mezzanine debt |
58,116 | 58,116 | 8 - 10 Years | | 203,969 | |||||||||||||||||||||
Distressed |
8,991 | 8,991 | 4 - 5 Years | | 5,102 | |||||||||||||||||||||
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Total private equity structures |
198,556 | 198,556 | | 461,642 | ||||||||||||||||||||||
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Distressed |
150,775 | 134,127 | 1 - 2 Years | 16,648 | Quarterly | 45 - 65 Days | | |||||||||||||||||||
Equity long/short |
116,019 | | 116,019 | Quarterly | 30 - 60 Days | | ||||||||||||||||||||
Multi-strategy |
131,224 | | 131,224 | Quarterly | 45 - 90 Days | | ||||||||||||||||||||
Global macro |
19,641 | | 19,641 | Monthly | 3 Days | | ||||||||||||||||||||
Event driven |
18,445 | | 18,445 | Annual | 60 Days | | ||||||||||||||||||||
Relative value credit |
101,311 | | 101,311 | Quarterly | 60 Days | | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total hedge funds |
537,415 | 134,127 | 403,288 | | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
Other private securities |
137,954 | | 137,954 | 5,000 | ||||||||||||||||||||||
High yield loan fund |
31,100 | | 31,100 | Monthly | 30 Days | | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total other invested assets |
$ | 905,025 | $ | 332,683 | $ | 572,342 | $ | 466,642 | ||||||||||||||||||
|
|
|
|
|
|
|
|
(1) | The redemption frequency and notice periods only apply to the investments without redemption restrictions. Some or all of these investments may be subject to a gate. |
In general, the Company has invested in hedge funds that require at least 30 days notice of redemption and may be redeemed on a monthly, quarterly, semi-annual, annual or longer basis, depending on the fund. Certain hedge funds have lock-up periods ranging from one to three years from initial investment. A lock-up period refers to the initial amount of time an investor is contractually required to invest before having the ability to redeem. Funds that provide for periodic redemptions may, depending on the funds governing documents, have the ability to deny or delay a redemption request, called a gate. The fund may implement this restriction because the aggregate amount of redemption requests as of a particular date exceeds a specified level, generally ranging from 15% to 25% of the funds net assets. The gate is a method for executing an orderly redemption process to reduce the possibility of adversely affecting investors in the fund. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion settled in cash sometime after the redemption date. Certain funds may impose a redemption fee on early redemptions. Interests in private equity funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund.
The following describes each investment type:
| Private equity funds: Primary funds may invest in companies and general partnership interests. Secondary funds buy limited partnership interests from existing limited partners of primary private equity funds. As owners of private equity funds seek liquidity, they can sell their existing investments, plus any remaining commitment, to secondary market participants. These funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund. |
| Mezzanine debt funds: Mezzanine debt funds primarily focus on providing capital to upper middle market and middle market companies and private equity sponsors, in connection with leveraged buyouts, mergers and acquisitions, recapitalizations, growth financings and other corporate transactions. The most common position in the capital structure will be between the senior secured debt holder and the equity; however, the funds will utilize a flexible approach when structuring investments, which may include secured debt, subordinated debt, preferred stock and/or private equity. These funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund. |
7
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
| Distressed funds: In distressed debt investing, managers take positions in the debt of companies experiencing significant financial difficulties, including bankruptcy, or in certain positions of the capital structure of structured securities. The manager relies on the fundamental analysis of these securities, including the claims on the assets and the likely return to bondholders. Certain funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund. |
| Equity long/short funds: In equity long/short funds, managers take long positions in companies they deem to be undervalued and short positions in companies they deem to be overvalued. Long/short managers may invest in countries, regions or sectors and vary by their use of leverage and by their targeted net long position. |
| Multi-strategy funds: These funds may utilize many strategies employed by specialized funds including distressed investing, equity long/short, merger arbitrage, convertible arbitrage, fixed income arbitrage and macro trading. |
| Global macro funds: These funds focus on a top-down analysis of global markets as influenced by major political and economic trends or events. Global macro managers develop investment strategies that aim to forecast movements in interest rates, fund flows, political changes and other wide-ranging systematic factors. The portfolios of these funds can include long or short positions in equities, fixed-income securities, currencies and commodities in the form of cash or derivatives instruments. |
| Event driven funds: Event driven strategies seek to deploy capital into specific securities whose returns are affected by a specific event that affects the value of one or more securities of a company. Returns for such securities are linked primarily to the specific outcome of the events and not by the overall direction of the bond or stock markets. Examples could include mergers and acquisitions (arbitrage), corporate restructurings and spin-offs, and capital structure arbitrage. |
| Relative value credit funds: These funds seek to take exposure to credit-sensitive securities, long and/or short, based upon credit analysis of issuers and securities and credit market views. |
| Other private securities: These securities include strategic non-controlling minority investments in private asset management companies and other insurance related investments that are accounted for using the equity method of accounting. |
| High yield loan fund: A long-only private mutual fund that invests in high yield fixed income securities. |
c) Net Investment Income
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Fixed maturity investments |
$ | 31,179 | $ | 36,778 | $ | 96,366 | $ | 120,883 | ||||||||
Equity securities |
6,110 | 5,211 | 13,718 | 13,706 | ||||||||||||
Other invested assets |
5,809 | 164 | 11,116 | 4,387 | ||||||||||||
Cash and cash equivalents |
302 | 640 | 1,319 | 1,797 | ||||||||||||
Expenses |
(4,129) | (3,672) | (12,225) | (11,992) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net investment income |
$ | 39,271 | $ | 39,121 | $ | 110,294 | $ | 128,781 | ||||||||
|
|
|
|
|
|
|
|
Net investment income from other invested assets included the distributed and undistributed net income from investments accounted for using the equity method of accounting for the three and nine months ended September 30, 2013.
8
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
d) Components of Realized Gains and Losses
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Gross realized gains on sale of invested assets |
$ | 51,915 | $ | 27,210 | $ | 154,387 | $ | 119,154 | ||||||||
Gross realized losses on sale of invested assets |
(40,770) | (6,686) | (82,812) | (43,355) | ||||||||||||
Net realized and unrealized (losses) gains on derivatives |
(4,169) | (962) | 3,392 | (192) | ||||||||||||
Mark-to-market gains (losses): |
||||||||||||||||
Fixed maturity investments, trading |
30,383 | 99,821 | (101,205) | 144,024 | ||||||||||||
Equity securities, trading |
(17,198) | 18,913 | (18,555) | 38,516 | ||||||||||||
Other invested assets, trading |
7,326 | 11,517 | 36,719 | 33,910 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net realized investment gains (losses) |
$ | 27,487 | $ | 149,813 | $ | (8,074) | $ | 292,057 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Proceeds from sale of available for sale securities |
$ | | $ | 1,000 | $ | | $ | 214,716 |
e) Pledged Assets
As of September 30, 2013 and December 31, 2012, $ 2,556,660 and $2,141,249, respectively, of cash and cash equivalents and investments were deposited, pledged or held in trust accounts in favor of ceding companies and other counterparties or government authorities to comply with reinsurance contract provisions, insurance laws and other contract provisions.
In addition, as of September 30, 2013 and December 31, 2012, a further $ 1,063,086 and $1,225,155, respectively, of cash and cash equivalents and investments were pledged as collateral for the Companys letter of credit facilities. See Note 8(d) to the Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2012 for details on the Companys credit facilities.
5. DERIVATIVE INSTRUMENTS
As of September 30, 2013 and December 31, 2012, none of the Companys derivatives were designated as hedges for accounting purposes. The following table summarizes information on the location and amounts of derivative fair values on the unaudited condensed consolidated balance sheets (consolidated balance sheets):
September 30, 2013 | December 31, 2012 | |||||||||||||||||||||||||||||||
Asset | Liability | Asset | Liability | |||||||||||||||||||||||||||||
Derivative | Asset | Derivative | Liability | Derivative | Asset | Derivative | Liability | |||||||||||||||||||||||||
Notional | Derivative | Notional | Derivative | Notional | Derivative | Notional | Derivative | |||||||||||||||||||||||||
Amount | Fair Value | Amount | Fair Value | Amount | Fair Value | Amount | Fair Value | |||||||||||||||||||||||||
Put options |
$ | | $ | | $ | | $ | | $ | 5,152 | $ | 532 | $ | | $ | | ||||||||||||||||
Foreign exchange contracts |
197,811 | 2,493 | 279,050 | 7,062 | 127,712 | 1,713 | 194,566 | 2,656 | ||||||||||||||||||||||||
Interest rate swaps |
33,000 | 5 | 327,000 | 172 | | | | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total derivatives |
$ | 230,811 | $ | 2,498 | $ | 606,050 | $ | 7,234 | $ | 132,864 | $ | 2,245 | $ | 194,566 | $ | 2,656 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets and derivative liabilities relating to the put options are classified within equity securities trading, at fair value on the consolidated balance sheets. All other asset and liability derivatives are classified within other assets or accounts payable and accrued liabilities on the consolidated balance sheets.
9
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
The following table provides the net realized and unrealized gains (losses) on derivatives not designated as hedges recorded on the consolidated income statements:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Foreign exchange contracts |
$ | (2,336) | $ | (676) | $ | (1,091) | $ | (96) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total included in foreign exchange (loss) gain |
(2,336) | (676) | (1,091) | (96) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Put options |
| | (3,822) | (336) | ||||||||||||
Foreign exchange contracts |
(4,164) | (2,751) | 1,925 | (641) | ||||||||||||
Interest rate futures and swaps |
(5) | 1,789 | 5,289 | 785 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total included in net realized investment gains |
(4,169) | (962) | 3,392 | (192) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total realized and unrealized (losses) gains on derivatives |
$ | (6,505) | $ | (1,638) | $ | 2,301 | $ | (288) | ||||||||
|
|
|
|
|
|
|
|
Derivative Instruments Not Designated as Hedging Instruments
The Company is exposed to foreign currency risk in its investment portfolio. Accordingly, the fair values of the Companys investment portfolio are partially influenced by the change in foreign exchange rates. These foreign currency hedging activities have not been designated as specific hedges for financial reporting purposes.
The Companys insurance and reinsurance subsidiaries and branches operate in various foreign countries and consequently the Companys underwriting portfolio is exposed to foreign currency risk. The Company manages foreign currency risk by seeking to match liabilities under the insurance policies and reinsurance contracts that it writes and that are payable in foreign currencies with cash and investments that are denominated in such currencies. When necessary, the Company may also use derivatives to economically hedge un-matched foreign currency exposures, specifically forward contracts and currency options.
The Company also purchases and sells interest rate future and interest rate swap contracts to actively manage the duration and yield curve positioning of its fixed income portfolio. Interest rate futures and interest rate swaps can efficiently increase or decrease the overall duration of the portfolio. Additionally, interest rate future and interest rate swap contracts can be utilized to obtain the desired position along the yield curve in order to protect against certain future yield curve shapes.
The Company also purchases options to actively manage the Companys equity portfolio.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level (Level 3). A fair value measurement will fall within the level of the hierarchy based on the input that is significant to determining such measurement. The three levels are defined as follows:
| Level 1: Observable inputs to the valuation methodology that are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| Level 2: Observable inputs to the valuation methodology other than quoted market prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
| Level 3: Inputs to the valuation methodology that are unobservable for the asset or liability. |
10
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
The following table shows the fair value of the Companys financial instruments and where in the fair value hierarchy the fair value measurements are included as of the dates indicated below:
Carrying | Total | |||||||||||||||||||
September 30, 2013 |
Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Fixed maturity investments: |
||||||||||||||||||||
U.S. Government and Government agencies |
$ | 1,850,335 | $ | 1,850,335 | $ | 1,522,185 | $ | 328,150 | $ | | ||||||||||
Non-U.S. Government and Government agencies |
209,625 | 209,625 | | 209,625 | | |||||||||||||||
States, municipalities and political subdivisions |
95,381 | 95,381 | | 95,381 | | |||||||||||||||
Corporate debt |
2,063,487 | 2,063,487 | | 2,063,487 | | |||||||||||||||
Mortgage-backed |
1,373,161 | 1,373,161 | | 1,183,907 | 189,254 | |||||||||||||||
Asset-backed |
455,894 | 455,894 | | 375,861 | 80,033 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total fixed maturity investments |
6,047,883 | 6,047,883 | 1,522,185 | 4,256,411 | 269,287 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Equity securities |
708,929 | 708,929 | 641,458 | | 67,471 | |||||||||||||||
Other invested assets |
767,071 | 767,071 | | | 767,071 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total investments |
$ | 7,523,883 | $ | 7,523,883 | $ | 2,163,643 | $ | 4,256,411 | $ | 1,103,829 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Derivative assets: |
||||||||||||||||||||
Foreign exchange contracts |
$ | 2,493 | $ | 2,493 | $ | | $ | 2,493 | $ | | ||||||||||
Interest rate futures |
5 | 5 | | 5 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Derivative liabilities: |
||||||||||||||||||||
Foreign exchange contracts |
$ | 7,062 | $ | 7,062 | $ | | $ | 7,062 | $ | | ||||||||||
Interest rate swaps |
172 | 172 | | 172 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Senior notes |
$ | 798,426 | $ | 904,010 | $ | | $ | 904,010 | $ | | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Carrying | Total | |||||||||||||||||||
December 31, 2012 |
Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Fixed maturity investments: |
||||||||||||||||||||
U.S. Government and Government agencies |
$ | 1,865,913 | $ | 1,865,913 | $ | 1,529,158 | $ | 336,755 | $ | | ||||||||||
Non-U.S. Government and Government agencies |
261,627 | 261,627 | | 261,627 | | |||||||||||||||
States, municipalities and political subdivisions |
40,444 | 40,444 | | 40,444 | | |||||||||||||||
Corporate debt |
2,089,202 | 2,089,202 | | 2,089,202 | | |||||||||||||||
Mortgage-backed |
1,958,373 | 1,958,373 | | 1,790,548 | 167,825 | |||||||||||||||
Asset-backed |
410,895 | 410,895 | | 348,649 | 62,246 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total fixed maturity investments |
6,626,454 | 6,626,454 | 1,529,158 | 4,867,225 | 230,071 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Equity securities |
523,949 | 523,949 | 469,269 | | 54,680 | |||||||||||||||
Other invested assets |
655,888 | 655,888 | | | 655,888 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total investments |
$ | 7,806,291 | $ | 7,806,291 | $ | 1,998,427 | $ | 4,867,225 | $ | 940,639 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Derivative assets: |
||||||||||||||||||||
Foreign exchange contracts |
$ | 1,713 | $ | 1,713 | $ | | $ | 1,713 | $ | | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Derivative liabilities: |
||||||||||||||||||||
Foreign exchange contracts |
$ | 2,656 | $ | 2,656 | $ | | $ | 2,656 | $ | | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Senior notes |
$ | 798,215 | $ | 918,627 | $ | | $ | 918,627 | $ | | ||||||||||
|
|
|
|
|
|
|
|
|
|
11
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Other invested assets excluded other private securities that the Company did not measure at fair value, but are accounted for using the equity method of accounting. Derivative assets and derivative liabilities relating to foreign exchange contracts and interest rate swaps are classified within other assets or accounts payable and accrued liabilities on the consolidated balance sheets.
The following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as of the balance sheet date.
U.S. Government and Government agencies: Comprised primarily of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. The fair values of the Companys U.S. government securities are based on quoted market prices in active markets and are included in the Level 1 fair value hierarchy. The Company believes the market for U.S. Treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy.
Non-U.S. Government and Government agencies: Comprised of fixed income obligations of non-U.S. governmental entities. The fair values of these securities are based on prices obtained from international indices and are included in the Level 2 fair value hierarchy.
States, municipalities and political subdivisions: Comprised of fixed income obligations of U.S. domiciled state and municipality entities. The fair values of these securities are based on prices obtained from the new issue market, and are included in the Level 2 fair value hierarchy.
Corporate debt: Comprised of bonds issued by or loan obligations of corporations that are diversified across a wide range of issuers and industries. The fair values of corporate debt that are short-term are priced using spread above the LIBOR yield curve, and the fair values of corporate debt that are long-term are priced using the spread above the risk-free yield curve. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price corporate bonds are observable market inputs, the fair values of corporate debt are included in the Level 2 fair value hierarchy.
Mortgage-backed: Primarily comprised of residential and commercial mortgages originated by both U.S. government agencies (such as the Federal National Mortgage Association) and non-U.S. government agencies. The fair values of mortgage-backed securities originated by U.S. government agencies and non-U.S. government agencies are based on a pricing model that incorporates prepayment speeds and spreads to determine appropriate average life of mortgage-backed securities. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the mortgage-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the mortgage-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.
Asset-backed: Principally comprised of bonds backed by pools of automobile loan receivables, home equity loans, credit card receivables and collateralized loan obligations originated by a variety of financial institutions. The fair values of asset-backed securities are priced using prepayment speed and spread inputs that are sourced from the new issue market or broker-dealer quotes. As the significant inputs used to price the asset-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the asset-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.
Equity securities: Comprised of common and preferred stocks and mutual funds. Equities are generally included in the Level 1 fair value hierarchy as prices are obtained from market exchanges in active markets. Non-U.S. mutual funds where the net asset value is not provided on a daily basis are included in the Level 3 fair value hierarchy.
Other invested assets: Comprised of funds invested in a range of diversified strategies. In accordance with U.S. GAAP, the fair values of the funds are based on the net asset value of the funds as reported by the fund manager that the Company believes is an unobservable input, and as such, the fair values of those funds are included in the Level 3 fair value hierarchy.
12
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Derivative instruments: The fair value of foreign exchange contracts, interest rate futures and interest rate swaps are priced from quoted market prices for similar exchange-traded derivatives and pricing valuation models that utilize independent market data inputs. The fair value of derivatives are included in the Level 2 fair value hierarchy.
Senior notes: The fair value of the senior notes is based on reported trades. The fair value of the senior notes is included in the Level 2 fair value hierarchy.
The Company measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include investments accounted for using the equity method, goodwill and intangible assets. The Company uses a variety of techniques to measure the fair value of these assets when appropriate, as described below:
Investments accounted for using the equity method: When the Company determines that the carrying value of these assets may not be recoverable, the Company records the assets at fair value with the loss recognized in income. In such cases, the Company measures the fair value of these assets using discounted cash flow models.
Goodwill and intangible assets: The Company tests goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, but at least annually for goodwill and indefinite-lived intangibles. If the Company determines that goodwill and intangible assets may be impaired, the Company uses techniques, including discounted expected future cash flows and market multiple models, to measure fair value.
The following is a reconciliation of the beginning and ending balance of financial instruments using significant unobservable inputs (Level 3):
Other invested assets |
Mortgage-backed | Asset-backed | Equities | |||||||||||||
Three Months Ended September 30, 2013 | ||||||||||||||||
Opening balance |
$ | 714,391 | $ | 198,003 | $ | 61,285 | $ | 53,499 | ||||||||
Realized and unrealized gains (losses) included in net income |
9,403 | 464 | (313) | 3,972 | ||||||||||||
Purchases |
67,554 | 69,775 | 16,969 | 10,000 | ||||||||||||
Sales |
(24,277) | (79,001) | (1,302) | | ||||||||||||
Transfers into Level 3 from Level 2 |
| 13 | 3,394 | | ||||||||||||
Transfers out of Level 3 into Level 2 (1) |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 767,071 | $ | 189,254 | $ | 80,033 | $ | 67,471 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Three Months Ended September 30, 2012 | ||||||||||||||||
Opening balance |
$ | 520,890 | $ | 157,959 | $ | 117,586 | $ | | ||||||||
Realized and unrealized gains included in net income |
11,871 | 4,855 | 988 | | ||||||||||||
Purchases |
34,800 | 40,481 | 7,466 | | ||||||||||||
Sales |
(2,859) | (48,728) | (7,326) | | ||||||||||||
Transfers into Level 3 from Level 2 |
| 14,730 | 12,495 | | ||||||||||||
Transfers out of Level 3 into Level 2 (1) |
| (27) | (55,442) | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 564,702 | $ | 169,270 | $ | 75,767 | $ | | ||||||||
|
|
|
|
|
|
|
|
13
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Other invested assets |
Mortgage-backed | Asset-backed | Equities | |||||||||||||
Nine Months Ended September 30, 2013 | ||||||||||||||||
Opening balance |
$ | 655,888 | $ | 167,825 | $ | 62,246 | $ | 54,680 | ||||||||
Realized and unrealized gains (losses) included in net income |
53,365 | (5,910) | (791) | 2,791 | ||||||||||||
Purchases |
237,506 | 102,369 | 42,956 | 10,000 | ||||||||||||
Sales |
(179,688) | (69,968) | (26,728) | | ||||||||||||
Transfers into Level 3 from Level 2 |
| 5,073 | 2,350 | | ||||||||||||
Transfers out of Level 3 into Level 2 (1) |
| (10,135) | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 767,071 | $ | 189,254 | $ | 80,033 | $ | 67,471 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Nine Months Ended September 30, 2012 | ||||||||||||||||
Opening balance |
$ | 540,409 | $ | 249,204 | $ | 94,745 | $ | | ||||||||
Realized and unrealized gains included in net income |
26,753 | 10,951 | 1,643 | | ||||||||||||
Purchases |
52,578 | 50,302 | 32,573 | | ||||||||||||
Sales |
(55,038) | (124,940) | (57,325) | | ||||||||||||
Transfers into Level 3 from Level 2 |
| 18,461 | 15,835 | | ||||||||||||
Transfers out of Level 3 into Level 2 (1) |
| (34,708) | (11,704) | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 564,702 | $ | 169,270 | $ | 75,767 | $ | | ||||||||
|
|
|
|
|
|
|
|
(1) | Transfers out of Level 3 are primarily attributable to the availability of market observable information. |
The Company attempts to verify the significant inputs used by broker-dealers in determining the fair value of the securities priced by them. If the Company could not obtain sufficient information to determine if the broker-dealers were using significant observable inputs, then such securities have been transferred to the Level 3 fair value hierarchy. The Company believes the prices obtained from the broker-dealers are the best estimate of fair value of the securities being priced as the broker-dealers are typically involved in the initial pricing of the security, and the Company has compared the price per the broker-dealer to other pricing sources and noted no material differences. The Company recognizes transfers between levels at the end of the reporting period. There were no transfers between Level 1 and Level 2 during the period.
The Companys external investment accounting service provider receives prices from internationally recognized independent pricing services to measure the fair values of its fixed maturity investments. Pricing sources are evaluated and selected in a manner to ensure that the most reliable sources are used. The Company uses a pricing service ranking to consistently select the most appropriate pricing service in instances where it receives multiple quotes on the same security. The Company obtains multiple quotes for the majority of its securities. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each pricing service has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of matrix pricing in which the independent pricing service uses observable market inputs, including, but not limited to, reported trades, benchmark yields, broker-dealer quotes, interest rates, prepayment speeds, default rates and such other inputs as are available from market sources to determine a reasonable fair value.
All of the Companys securities classified as Level 3, other than investments in other invested assets, are valued based on unadjusted broker-dealer quotes. This includes less liquid securities such as lower quality asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities. The primary valuation inputs include monthly payment information, the probability of default, loss severity rates and estimated prepayment rates. Significant changes in these inputs in isolation would result in a significantly lower or higher fair value measurement. In general, a change in the assumption of the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity in an event of default and prepayment rates.
The Company records the unadjusted price provided and validates this price through a process that includes, but is not limited to, monthly and/or quarterly: (i) comparison of prices between two independent sources, with significant differences requiring additional price sources; (ii) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to their target benchmark, with
14
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
significant differences identified and investigated); (iii) evaluation of methodologies used by external parties to calculate fair value, including a review of the inputs used for pricing; (iv) comparing the price to the Companys knowledge of the current investment market; and (v) back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. In addition to internal controls, management relies on the effectiveness of the valuation controls in place at the Companys external investment accounting service provider (supported by a Statement on Standards for Attestation Engagements No. 16 report) in conjunction with regular discussion and analysis of the investment portfolios structure and performance.
7. RESERVE FOR LOSSES AND LOSS EXPENSES
The reserve for losses and loss expenses consists of the following:
September 30, | December 31, | |||||||
2013 | 2012 | |||||||
Outstanding loss reserves |
$ | 1,517,049 | $ | 1,539,114 | ||||
Reserves for losses incurred but not reported |
4,263,732 | 4,106,435 | ||||||
|
|
|
|
|||||
Reserve for losses and loss expenses |
$ | 5,780,781 | $ | 5,645,549 | ||||
|
|
|
|
The table below is a reconciliation of the beginning and ending liability for unpaid losses and loss expenses. Losses incurred and paid are reflected net of reinsurance recoverables.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Gross liability at beginning of period |
$ | 5,696,865 | $ | 5,377,518 | $ | 5,645,549 | $ | 5,225,143 | ||||||||
Reinsurance recoverable at beginning of period |
(1,179,525) | (1,073,612) | (1,141,110) | (1,002,919) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net liability at beginning of period |
4,517,340 | 4,303,906 | 4,504,439 | 4,222,224 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net losses incurred related to: |
||||||||||||||||
Current year |
338,420 | 315,102 | 961,224 | 862,088 | ||||||||||||
Prior years |
(61,450) | (56,154) | (153,948) | (137,558) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total incurred |
276,970 | 258,948 | 807,276 | 724,530 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net paid losses related to: |
||||||||||||||||
Current year |
30,399 | 16,323 | 54,983 | 36,163 | ||||||||||||
Prior years |
213,252 | 179,666 | 696,137 | 542,077 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total paid |
243,651 | 195,989 | 751,120 | 578,240 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Foreign exchange revaluation |
4,088 | 6,400 | (5,848) | 4,751 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net liability at end of period |
4,554,747 | 4,373,265 | 4,554,747 | 4,373,265 | ||||||||||||
Reinsurance recoverable at end of period |
1,226,034 | 1,077,522 | 1,226,034 | 1,077,522 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross liability at end of period |
$ | 5,780,781 | $ | 5,450,787 | $ | 5,780,781 | $ | 5,450,787 | ||||||||
|
|
|
|
|
|
|
|
For the three months ended September 30, 2013, the Company had net favorable reserve development in its international insurance and reinsurance segments due to actual loss emergence being lower than initially expected. The majority of the net favorable reserve development was recognized in the 2007 through 2011 loss years across most lines of business. In addition, the reinsurance segment recognized net favorable reserve development for the 2012 loss year due to the low level of reported property losses. This was partially offset by adverse development in the U.S. insurance segment in the 2011 and 2012 loss years primarily caused by adverse development on reported claims for certain healthcare, errors and omissions and private/not for profit directors and officers.
For the nine months ended September 30, 2013, the Company had net favorable reserve development in its international insurance and reinsurance segments due to actual loss emergence being lower than initially expected, for most loss years. The reinsurance segment recognized net favorable reserve development for the 2012 loss year due to the low level of reported property losses. This was partially offset by adverse development in the U.S. insurance segment in the 2011 and 2012 loss years for certain healthcare, errors and omissions and not-for-profit directors and officers classes of business.
15
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
For the three months ended September 30, 2012, the Company had net favorable reserve development in each of its segments due to actual loss emergence being lower than initially expected. The majority of the net favorable reserve development was recognized by each segment in the 2004 through 2008 loss years. The Company had net unfavorable reserve development in its U.S. insurance segment in the 2010 and 2011 loss years, primarily due to higher than expected losses on a terminated program, and in its international insurance segment in the 2011 loss year, primarily due to an individual full-limit general casualty claim.
For the nine months ended September 30, 2012, the Company had net favorable reserve development in each of its segments due to actual loss emergence being lower than initially expected. The majority of the net favorable reserve development was recognized in the international insurance and reinsurance segments in the 2004 through 2008 loss years.
While the Company has experienced favorable reserve development in its insurance and reinsurance lines, there is no assurance that conditions and trends that have affected the development of liabilities in the past will continue. It is not appropriate to extrapolate future redundancies based on prior years development. The methodology of estimating loss reserves is periodically reviewed to ensure that the key assumptions used in the actuarial models continue to be appropriate.
8. INCOME TAXES
Under Swiss law, a resident company is subject to income tax at the federal, cantonal and communal levels that is levied on net income. Income attributable to permanent establishments or real estate located abroad is excluded from the Swiss tax base. Allied World Switzerland is a holding company and, therefore, is exempt from cantonal and communal income tax. As a result, Allied World Switzerland is subject to Swiss income tax only at the federal level. Allied World Switzerland is a resident of the Canton of Zug and, as such, is subject to an annual cantonal and communal capital tax on the taxable equity of Allied World Switzerland. Allied World Switzerland has a Swiss operating company resident in the Canton of Zug. The operating company is subject to federal, cantonal and communal income tax and to annual cantonal and communal capital tax.
Under current Bermuda law, Allied World Assurance Company Holdings, Ltd (Allied World Bermuda) and its Bermuda subsidiaries are not required to pay taxes in Bermuda on either income or capital gains. Allied World Bermuda and Allied World Assurance Company, Ltd have received an assurance from the Bermuda Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, that in the event of any such taxes being imposed, Allied World Bermuda and Allied World Assurance Company, Ltd will be exempted until March 2035.
Certain subsidiaries of Allied World Switzerland file U.S. federal income tax returns and various U.S. state income tax returns, as well as income tax returns in the United Kingdom, Ireland, Switzerland, Hong Kong and Singapore. To the best of the Companys knowledge, there are no income tax examinations pending by any tax authority.
Management has deemed all material tax positions to have a greater than 50% likelihood of being sustained based on technical merits if challenged. The Company does not expect any material unrecognized tax benefits within 12 months of September 30, 2013.
9. SHAREHOLDERS EQUITY
a) Authorized shares
The issued share capital consists of the following:
September 30, | December 31, | |||||||
2013 | 2012 | |||||||
Common shares issued and fully paid, 2013: CHF 12.30 per share; 2012: CHF 12.64 per share |
34,972,795 | 36,369,868 | ||||||
|
|
|
|
|||||
Share capital at end of period |
$ | 424,837 | $ | 454,980 | ||||
|
|
|
|
16
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Nine Months | ||||
Ended | ||||
September 30, | ||||
2013 | ||||
Shares issued at beginning of period |
36,369,868 | |||
Shares cancelled |
(1,397,073) | |||
|
|
|||
Total shares issued at end of period |
34,972,795 | |||
|
|
|||
Treasury shares issued at beginning of period |
1,572,087 | |||
Shares repurchased |
1,367,833 | |||
Shares issued out of treasury |
(384,972) | |||
Shares cancelled |
(1,397,073) | |||
|
|
|||
Total treasury shares at end of period |
1,157,875 | |||
|
|
|||
Total shares outstanding at end of period |
33,814,920 | |||
|
|
During the nine months ended September 30, 2013, 1,367,833 voting shares repurchased and designated for cancellation were constructively retired and cancelled.
Effective July 9, 2013, the Company cancelled 29,240 non-voting shares held in treasury and 1,538,686 shares previously repurchased and constructively retired, following a required filing with the Swiss Commercial Register in Zug.
Allied World Switzerlands articles of association authorized its Board of Directors to increase the share capital by a maximum of up to CHF 92,259 or 7,500,728 voting shares.
b) Dividends
The Company paid the following dividends during the nine months ended September 30, 2013:
Partial | ||||||||||||||||
Par Value | Dividend | Total | ||||||||||||||
Reduction | Per | Amount | ||||||||||||||
Dividend Paid | Per Share | Share | Paid | |||||||||||||
March 12, 2013 |
CHF | 0.34 | $ | 0.375 | $ | 12,981 | ||||||||||
July 3, 2013 |
- | - | $ | 0.500 | $ | 17,117 |
On May 3, 2012, the shareholders approved the Companys proposal to pay cash dividends in the form of a distribution by way of par value reductions. The aggregate reduction amount was paid to shareholders in four installments of $0.375 per share, with the last of such quarterly dividend payments being made on March 12, 2013.
On May 2, 2013, the shareholders approved the Companys proposal to pay cash dividends in the form of a distribution out of general legal reserve from capital contributions. The distribution amount will be paid to shareholders in quarterly dividends of $0.50 per share. The first dividend was paid on July 3, 2013. The second dividend was paid on October 3, 2013. The Company expects to pay the remaining dividends in January 2014 and April 2014.
c) Share Repurchases
In May 2012, the Company established a new share repurchase program in order to repurchase up to $500,000 of its common shares. Repurchases may be effected from time to time through open market purchases, privately negotiated transactions, tender offers or otherwise. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Companys capital position, legal requirements and other factors. Under the terms of this new share repurchase program, common shares repurchased shall be designated for cancellation at acquisition and shall be cancelled upon shareholder approval.
17
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Shares repurchased by the Company and not designated for cancellation are classified as Treasury shares, at cost on the consolidated balance sheets. The Company will issue shares out of treasury principally related to the Companys employee benefit plans. Shares repurchased and designated for cancellation are constructively retired and recorded as a share cancellation.
The Companys share repurchases were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Common shares repurchased |
427,388 | 605,898 | 1,367,833 | 2,942,085 | ||||||||||||
Total cost of shares repurchased |
$ | 40,574 | $ | 47,590 | $ | 123,145 | $ | 207,048 | ||||||||
Average price per share |
$ | 94.93 | $ | 78.54 | $ | 90.03 | $ | 70.37 |
10. EARNINGS PER SHARE
The following table sets forth the comparison of basic and diluted earnings per share:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Basic earnings per share: |
||||||||||||||||
Net income |
$ | 122,843 | $ | 219,647 | $ | 279,973 | $ | 534,154 | ||||||||
Weighted average common shares outstanding |
33,991,359 | 35,652,768 | 34,340,227 | 36,379,514 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic earnings per share |
$ | 3.61 | $ | 6.16 | $ | 8.15 | $ | 14.68 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Diluted earnings per share: |
||||||||||||||||
Net income |
$ | 122,843 | $ | 219,647 | $ | 279,973 | $ | 534,154 | ||||||||
Weighted average common shares outstanding |
33,991,359 | 35,652,768 | 34,340,227 | 36,379,514 | ||||||||||||
Share equivalents: |
||||||||||||||||
Options |
500,114 | 461,373 | 497,458 | 429,393 | ||||||||||||
Restricted stock units and performance-based equity awards |
236,133 | 501,633 | 292,369 | 583,226 | ||||||||||||
Employee share purchase plan |
587 | 960 | 1,038 | 960 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average common shares and common share equivalents outstanding - diluted |
34,728,193 | 36,616,734 | 35,131,092 | 37,393,093 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted earnings per share |
$ | 3.54 | $ | 6.00 | $ | 7.97 | $ | 14.28 | ||||||||
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2013, no employee stock options and restricted stock units (RSUs) were considered anti-dilutive.
For the three and nine months ended September 30, 2012, a weighted average of 221,008 and 338,395 employee stock options and RSUs were considered anti-dilutive and were therefore excluded from the calculation of the diluted earnings per share, respectively.
11. SEGMENT INFORMATION
The determination of reportable segments is based on how senior management monitors the Companys underwriting operations. Management monitors the performance of its direct underwriting operations based on the geographic location of the Companys offices, the markets and customers served and the type of accounts written. The Company is currently organized into three operating segments: U.S. insurance, international insurance and reinsurance. All product lines fall within these classifications.
18
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
The U.S. insurance segment includes the Companys direct specialty insurance operations in the United States. This segment provides both direct property and specialty casualty insurance primarily to non-Fortune 1000 North American domiciled accounts. The international insurance segment includes the Companys direct insurance operations in Bermuda, Europe, Singapore and Hong Kong. This segment provides both direct property and casualty insurance primarily to Fortune 1000 North American domiciled accounts from the Bermuda office and direct property and specialty casualty insurance to our non-North American domiciled accounts from the European, Singapore and Hong Kong offices. The reinsurance segment includes the Companys reinsurance operations in the United States, Bermuda, Europe, Singapore and Hong Kong. This segment provides reinsurance of property, general casualty, professional liability, specialty lines and property catastrophe coverages written by insurance companies. The Company presently writes reinsurance on both a treaty and a facultative basis, targeting several niche reinsurance markets.
Responsibility and accountability for the results of underwriting operations are assigned by major line of business within each segment. Because the Company does not manage its assets by segment, investment income, interest expense and total assets are not allocated to individual reportable segments. General and administrative expenses are allocated to segments based on various factors, including staff count and each segments proportional share of gross premiums written.
Management measures results for each segment on the basis of the loss and loss expense ratio, acquisition cost ratio, general and administrative expense ratio and the combined ratio. The loss and loss expense ratio is derived by dividing net losses and loss expenses by net premiums earned. The acquisition cost ratio is derived by dividing acquisition costs by net premiums earned. The general and administrative expense ratio is derived by dividing general and administrative expenses by net premiums earned. The combined ratio is the sum of the loss and loss expense ratio, the acquisition cost ratio and the general and administrative expense ratio.
The following tables provide a summary of the segment results:
Three Months Ended September 30, 2013 |
U.S. Insurance | International Insurance |
Reinsurance | Total | ||||||||||||
Gross premiums written |
$ | 308,709 | $ | 132,881 | $ | 139,303 | $ | 580,893 | ||||||||
Net premiums written |
238,792 | 75,632 | 138,653 | 453,077 | ||||||||||||
Net premiums earned |
207,602 | 87,554 | 215,617 | 510,773 | ||||||||||||
Net losses and loss expenses |
(141,222) | (31,094) | (104,654) | (276,970) | ||||||||||||
Acquisition costs |
(28,426) | 282 | (36,970) | (65,114) | ||||||||||||
General and administrative expenses |
(41,616) | (26,450) | (20,487) | (88,553) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Underwriting (loss) income |
(3,662) | 30,292 | 53,506 | 80,136 | ||||||||||||
Net investment income |
39,271 | |||||||||||||||
Net realized investment gains |
27,487 | |||||||||||||||
Amortization of intangible assets |
(633) | |||||||||||||||
Interest expense |
(14,094) | |||||||||||||||
Foreign exchange loss |
(4,353) | |||||||||||||||
|
|
|||||||||||||||
Income before income taxes |
$ | 127,814 | ||||||||||||||
|
|
|||||||||||||||
Loss and loss expense ratio |
68.0% | 35.5% | 48.5% | 54.2% | ||||||||||||
Acquisition cost ratio |
13.7% | (0.3%) | 17.1% | 12.7% | ||||||||||||
General and administrative expense ratio |
20.0% | 30.2% | 9.5% | 17.3% | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Combined ratio |
101.7% | 65.4% | 75.1% | 84.2% | ||||||||||||
|
|
|
|
|
|
|
|
19
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
International | ||||||||||||||||
Three Months Ended September 30, 2012 |
U.S. Insurance | Insurance | Reinsurance | Total | ||||||||||||
Gross premiums written |
$ | 263,129 | $ | 121,315 | $ | 119,976 | $ | 504,420 | ||||||||
Net premiums written |
200,779 | 71,199 | 119,559 | 391,537 | ||||||||||||
Net premiums earned |
173,948 | 85,329 | 181,740 | 441,017 | ||||||||||||
Net losses and loss expenses |
(109,111) | (15,099) | (134,738) | (258,948) | ||||||||||||
Acquisition costs |
(22,696) | 266 | (28,656) | (51,086) | ||||||||||||
General and administrative expenses |
(37,388) | (22,920) | (18,264) | (78,572) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Underwriting income |
4,753 | 47,576 | 82 | 52,411 | ||||||||||||
Net investment income |
39,121 | |||||||||||||||
Net realized investment gains |
149,813 | |||||||||||||||
Amortization of intangible assets |
(633) | |||||||||||||||
Interest expense |
(13,822) | |||||||||||||||
Foreign exchange loss |
(1,023) | |||||||||||||||
|
|
|||||||||||||||
Income before income taxes |
$ | 225,867 | ||||||||||||||
|
|
|||||||||||||||
Loss and loss expense ratio |
62.7% | 17.7% | 74.1% | 58.7% | ||||||||||||
Acquisition cost ratio |
13.0% | (0.3%) | 15.8% | 11.6% | ||||||||||||
General and administrative expense ratio |
21.5% | 26.9% | 10.0% | 17.8% | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Combined ratio |
97.2% | 44.3% | 99.9% | 88.1% | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
International | ||||||||||||||||
Nine Months Ended September 30, 2013 |
U.S. Insurance | Insurance | Reinsurance | Total | ||||||||||||
Gross premiums written |
$ | 872,024 | $ | 453,990 | $ | 857,160 | $ | 2,183,174 | ||||||||
Net premiums written |
652,464 | 259,771 | 817,116 | 1,729,351 | ||||||||||||
Net premiums earned |
593,477 | 258,809 | 628,986 | 1,481,272 | ||||||||||||
Net losses and loss expenses |
(398,910) | (90,997) | (317,369) | (807,276) | ||||||||||||
Acquisition costs |
(78,824) | 1,489 | (109,081) | (186,416) | ||||||||||||
General and administrative expenses |
(119,514) | (75,374) | (56,930) | (251,818) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Underwriting (loss) income |
(3,771) | 93,927 | 145,606 | 235,762 | ||||||||||||
Net investment income |
110,294 | |||||||||||||||
Net realized investment losses |
(8,074) | |||||||||||||||
Amortization of intangible assets |
(1,900) | |||||||||||||||
Interest expense |
(42,416) | |||||||||||||||
Foreign exchange loss |
(7,361) | |||||||||||||||
|
|
|||||||||||||||
Income before income taxes |
$ | 286,305 | ||||||||||||||
|
|
|||||||||||||||
Loss and loss expense ratio |
67.2% | 35.2% | 50.5% | 54.5% | ||||||||||||
Acquisition cost ratio |
13.3% | (0.6%) | 17.3% | 12.6% | ||||||||||||
General and administrative expense ratio |
20.1% | 29.1% | 9.1% | 17.0% | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Combined ratio |
100.6% | 63.7% | 76.9% | 84.1% | ||||||||||||
|
|
|
|
|
|
|
|
20
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
International | ||||||||||||||||
Nine Months Ended September 30, 2012 |
U.S. Insurance | Insurance | Reinsurance | Total | ||||||||||||
Gross premiums written |
$ | 733,314 | $ | 418,498 | $ | 680,407 | $ | 1,832,219 | ||||||||
Net premiums written |
551,286 | 255,150 | 668,764 | 1,475,200 | ||||||||||||
Net premiums earned |
490,091 | 247,805 | 534,758 | 1,272,654 | ||||||||||||
Net losses and loss expenses |
(309,889) | (75,432) | (339,209) | (724,530) | ||||||||||||
Acquisition costs |
(63,918) | 1,376 | (87,270) | (149,812) | ||||||||||||
General and administrative expenses |
(103,162) | (66,969) | (52,786) | (222,917) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Underwriting income |
13,122 | 106,780 | 55,493 | 175,395 | ||||||||||||
Net investment income |
128,781 | |||||||||||||||
Net realized investment gains |
292,057 | |||||||||||||||
Amortization of intangible assets |
(1,900) | |||||||||||||||
Interest expense |
(41,579) | |||||||||||||||
Foreign exchange gain |
77 | |||||||||||||||
|
|
|||||||||||||||
Income before income taxes |
$ | 552,831 | ||||||||||||||
|
|
|||||||||||||||
Loss and loss expense ratio |
63.2% | 30.4% | 63.4% | 56.9% | ||||||||||||
Acquisition cost ratio |
13.0% | (0.6%) | 16.3% | 11.8% | ||||||||||||
General and administrative expense ratio |
21.0% | 27.0% | 9.9% | 17.5% | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Combined ratio |
97.2% | 56.8% | 89.6% | 86.2% | ||||||||||||
|
|
|
|
|
|
|
|
The following table shows an analysis of the Companys gross premiums written by geographic location of the Companys subsidiaries and branches. All intercompany premiums have been eliminated.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
United States |
$ | 377,618 | $ | 312,807 | $ | 1,296,212 | $ | 1,051,355 | ||||||||
Bermuda |
111,103 | 108,955 | 550,815 | 484,313 | ||||||||||||
Europe |
52,004 | 46,836 | 198,747 | 182,220 | ||||||||||||
Singapore |
35,515 | 31,902 | 122,546 | 101,213 | ||||||||||||
Hong Kong |
4,653 | 3,920 | 14,854 | 13,118 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total gross premiums written |
$ | 580,893 | $ | 504,420 | $ | 2,183,174 | $ | 1,832,219 | ||||||||
|
|
|
|
|
|
|
|
Europe includes gross premiums written attributable to Switzerland of $10,509 and $7,039 for the three months ended September 30, 2013 and 2012, respectively, and $57,183 and $40,474 for the nine months ended September 30, 2013 and 2012, respectively.
12. COMMITMENTS AND CONTINGENCIES
The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. These legal proceedings generally relate to claims asserted by or against the Company in the ordinary course of insurance or reinsurance operations. Estimated amounts payable under these proceedings are included in the reserve for losses and loss expenses in the Companys consolidated balance sheets. As of September 30, 2013, the Company was not a party to any material legal proceedings arising outside the ordinary course of business that management believes will have a material adverse effect on the Companys results of operations, financial position or cash flow.
13. CONDENSED CONSOLIDATED GUARANTOR FINANCIAL STATEMENTS
The following tables present unaudited condensed consolidating financial information as of September 30, 2013 and December 31, 2012 and for the three and nine months ended September 30, 2013 and 2012 for Allied World Switzerland (the Parent Guarantor) and Allied World Bermuda (the Subsidiary Issuer). The Subsidiary Issuer is a direct, 100%-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantors investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees the senior notes issued by the Subsidiary Issuer.
21
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Unaudited Condensed Consolidating Balance Sheet:
Allied World | Allied World | |||||||||||||||||||
Switzerland | Bermuda | Other Allied | Allied World | |||||||||||||||||
(Parent | (Subsidiary | World | Consolidating | Switzerland | ||||||||||||||||
As of September 30, 2013 |
Guarantor) | Issuer) | Subsidiaries | Adjustments | Consolidated | |||||||||||||||
ASSETS: |
||||||||||||||||||||
Investments |
$ | | $ | | $ | 7,661,837 | $ | | $ | 7,661,837 | ||||||||||
Cash and cash equivalents |
56,060 | 8,388 | 888,599 | | 953,047 | |||||||||||||||
Insurance balances receivable |
| | 740,112 | | 740,112 | |||||||||||||||
Funds held |
| | 375,131 | | 375,131 | |||||||||||||||
Reinsurance recoverable |
| | 1,226,034 | | 1,226,034 | |||||||||||||||
Net deferred acquisition costs |
| | 145,951 | | 145,951 | |||||||||||||||
Goodwill and intangible assets |
| | 317,840 | | 317,840 | |||||||||||||||
Balances receivable on sale of investments |
| | 237,031 | | 237,031 | |||||||||||||||
Investments in subsidiaries |
3,407,988 | 4,509,074 | | (7,917,062) | | |||||||||||||||
Due (to) from subsidiaries |
(967) | (14,679) | 15,646 | | | |||||||||||||||
Other assets |
1,897 | 5,038 | 713,602 | | 720,537 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 3,464,978 | $ | 4,507,821 | $ | 12,321,783 | $ | (7,917,062) | $ | 12,377,520 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES: |
||||||||||||||||||||
Reserve for losses and loss expenses |
$ | | $ | | $ | 5,780,781 | $ | | $ | 5,780,781 | ||||||||||
Unearned premiums |
| | 1,515,746 | | 1,515,746 | |||||||||||||||
Reinsurance balances payable |
| | 193,643 | | 193,643 | |||||||||||||||
Balances due on purchases of investments |
| | 497,974 | | 497,974 | |||||||||||||||
Senior notes |
| 798,426 | | | 798,426 | |||||||||||||||
Other liabilities |
21,050 | 17,457 | 108,515 | | 147,022 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
21,050 | 815,883 | 8,096,659 | | 8,933,592 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total shareholders equity |
3,443,928 | 3,691,938 | 4,225,124 | (7,917,062) | 3,443,928 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and shareholders equity |
$ | 3,464,978 | $ | 4,507,821 | $ | 12,321,783 | $ | (7,917,062) | $ | 12,377,520 | ||||||||||
|
|
|
|
|
|
|
|
|
|
22
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Allied World | Allied World | |||||||||||||||||||
Switzerland | Bermuda | Other Allied | Allied World | |||||||||||||||||
(Parent | (Subsidiary | World | Consolidating | Switzerland | ||||||||||||||||
As of December 31, 2012 |
Guarantor) | Issuer) | Subsidiaries | Adjustments | Consolidated | |||||||||||||||
ASSETS: |
||||||||||||||||||||
Investments |
$ | | $ | | $ | 7,933,937 | $ | | $ | 7,933,937 | ||||||||||
Cash and cash equivalents |
19,997 | 11,324 | 650,558 | | 681,879 | |||||||||||||||
Insurance balances receivable |
| | 510,532 | | 510,532 | |||||||||||||||
Funds held |
| | 336,368 | | 336,368 | |||||||||||||||
Reinsurance recoverable |
| | 1,141,110 | | 1,141,110 | |||||||||||||||
Net deferred acquisition costs |
| | 108,010 | | 108,010 | |||||||||||||||
Goodwill and intangible assets |
| | 319,741 | | 319,741 | |||||||||||||||
Balances receivable on sale of investments |
| | 418,879 | | 418,879 | |||||||||||||||
Investments in subsidiaries |
3,337,446 | 4,768,769 | | (8,106,215) | | |||||||||||||||
Due (to) from subsidiaries |
(23,864) | (7,173) | 31,037 | | | |||||||||||||||
Other assets |
1,499 | 6,081 | 571,910 | | 579,490 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 3,335,078 | $ | 4,779,001 | $ | 12,022,082 | $ | (8,106,215) | $ | 12,029,946 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES: |
||||||||||||||||||||
Reserve for losses and loss expenses |
$ | | $ | | $ | 5,645,549 | $ | | $ | 5,645,549 | ||||||||||
Unearned premiums |
| | 1,218,021 | | 1,218,021 | |||||||||||||||
Reinsurance balances payable |
| | 136,264 | | 136,264 | |||||||||||||||
Balances due on purchases of investments |
| | 759,934 | | 759,934 | |||||||||||||||
Senior notes |
| 798,215 | | | 798,215 | |||||||||||||||
Other liabilities |
8,743 | 17,727 | 119,158 | | 145,628 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
8,743 | 815,942 | 7,878,926 | | 8,703,611 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total shareholders equity |
3,326,335 | 3,963,059 | 4,143,156 | (8,106,215) | 3,326,335 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and shareholders equity |
$ | 3,335,078 | $ | 4,779,001 | $ | 12,022,082 | $ | (8,106,215) | $ | 12,029,946 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Unaudited Condensed Consolidating Income Statement:
Allied World | Allied World | |||||||||||||||||||
Switzerland | Bermuda | Other Allied | Allied World | |||||||||||||||||
(Parent | (Subsidiary | World | Consolidating | Switzerland | ||||||||||||||||
Three Months Ended September 30, 2013 |
Guarantor) | Issuer) | Subsidiaries | Adjustments | Consolidated | |||||||||||||||
Net premiums earned |
$ | | $ | | $ | 510,773 | $ | | $ | 510,773 | ||||||||||
Net investment income |
3 | | 39,268 | | 39,271 | |||||||||||||||
Net realized investment losses |
| | 27,487 | | 27,487 | |||||||||||||||
Net losses and loss expenses |
| | (276,970) | | (276,970) | |||||||||||||||
Acquisition costs |
| | (65,114) | | (65,114) | |||||||||||||||
General and administrative expenses |
(7,323) | (4,961) | (76,269) | | (88,553) | |||||||||||||||
Amortization of intangible assets |
| | (633) | | (633) | |||||||||||||||
Interest expense |
| (13,838) | (256) | | (14,094) | |||||||||||||||
Foreign exchange gain (loss) |
(13) | (212) | (4,128) | | (4,353) | |||||||||||||||
Income tax (expense) benefit |
| | (4,971) | | (4,971) | |||||||||||||||
Equity in earnings of consolidated subsidiaries |
130,176 | 150,653 | | (280,829) | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME (LOSS) |
$ | 122,843 | $ | 131,642 | $ | 149,187 | $ | (280,829) | $ | 122,843 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive income |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
COMPREHENSIVE INCOME (LOSS) |
$ | 122,843 | $ | 131,642 | $ | 149,187 | $ | (280,829) | $ | 122,843 | ||||||||||
|
|
|
|
|
|
|
|
|
|
23
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Three Months Ended September 30, 2012 |
Allied World Switzerland (Parent Guarantor) |
Allied World Bermuda (Subsidiary Issuer) |
Other Allied World Subsidiaries |
Consolidating Adjustments |
Allied World Switzerland Consolidated |
|||||||||||||||
Net premiums earned |
$ | | $ | | $ | 441,017 | $ | | $ | 441,017 | ||||||||||
Net investment income |
7 | 6 | 39,108 | | 39,121 | |||||||||||||||
Net realized investment gains |
| | 149,813 | | 149,813 | |||||||||||||||
Net losses and loss expenses |
| | (258,948) | | (258,948) | |||||||||||||||
Acquisition costs |
| | (51,086) | | (51,086) | |||||||||||||||
General and administrative expenses |
(6,013) | (235) | (72,324) | | (78,572) | |||||||||||||||
Amortization of intangible assets |
| | (633) | | (633) | |||||||||||||||
Interest expense |
| (13,822) | | | (13,822) | |||||||||||||||
Foreign exchange gain (loss) |
(206) | (83) | (734) | | (1,023) | |||||||||||||||
Income tax (expense) benefit |
| | (6,220) | | (6,220) | |||||||||||||||
Equity in earnings of consolidated subsidiaries |
225,859 | 231,471 | | (457,330) | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME (LOSS) |
$ | 219,647 | $ | 217,337 | $ | 239,993 | $ | (457,330) | $ | 219,647 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Unrealized losses on investments arising during the period net of applicable deferred income tax benefit of $15 |
(29) | | (29) | 29 | (29) | |||||||||||||||
Reclassification adjustment for net realized investment gains included in net income, net of applicable income tax |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive loss |
(29) | | (29) | 29 | (29) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
COMPREHENSIVE INCOME (LOSS) |
$ | 219,618 | $ | 217,337 | $ | 239,964 | $ | (457,301) | $ | 219,618 | ||||||||||
|
|
|
|
|
|
|
|
|
|
24
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Nine Months Ended September 30, 2013 |
Allied World Switzerland (Parent Guarantor) |
Allied World Bermuda (Subsidiary Issuer) |
Other Allied World Subsidiaries |
Consolidating Adjustments |
Allied World Switzerland Consolidated |
|||||||||||||||
Net premiums earned |
$ | | $ | | $ | 1,481,272 | $ | | $ | 1,481,272 | ||||||||||
Net investment income |
11 | 4 | 110,279 | | 110,294 | |||||||||||||||
Net realized investment losses |
| | (8,074) | | (8,074) | |||||||||||||||
Net losses and loss expenses |
| | (807,276) | | (807,276) | |||||||||||||||
Acquisition costs |
| | (186,416) | | (186,416) | |||||||||||||||
General and administrative expenses |
(26,875) | (5,873) | (219,070) | | (251,818) | |||||||||||||||
Amortization of intangible assets |
| | (1,900) | | (1,900) | |||||||||||||||
Interest expense |
| (41,503) | (913) | | (42,416) | |||||||||||||||
Foreign exchange loss (gain) |
261 | (935) | (6,687) | | (7,361) | |||||||||||||||
Income tax (expense) benefit |
| | (6,332) | | (6,332) | |||||||||||||||
Equity in earnings of consolidated subsidiaries |
306,576 | 353,280 | | (659,856) | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME (LOSS) |
$ | 279,973 | $ | 304,973 | $ | 354,883 | $ | (659,856) | $ | 279,973 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive income |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
COMPREHENSIVE INCOME (LOSS) |
$ | 279,973 | $ | 304,973 | $ | 354,883 | $ | (659,856) | $ | 279,973 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Nine Months Ended September 30, 2012 |
Allied World Switzerland (Parent Guarantor) |
Allied World Bermuda (Subsidiary Issuer) |
Other Allied World Subsidiaries |
Consolidating Adjustments |
Allied World Switzerland Consolidated |
|||||||||||||||
Net premiums earned |
$ | | $ | | $ | 1,272,654 | $ | | $ | 1,272,654 | ||||||||||
Net investment income |
21 | 17 | 128,743 | | 128,781 | |||||||||||||||
Net realized investment gains |
| | 292,057 | | 292,057 | |||||||||||||||
Net losses and loss expenses |
| | (724,530) | | (724,530) | |||||||||||||||
Acquisition costs |
| | (149,812) | | (149,812) | |||||||||||||||
General and administrative expenses |
(14,247) | (2,689) | (205,981) | | (222,917) | |||||||||||||||
Amortization of intangible assets |
| | (1,900) | | (1,900) | |||||||||||||||
Interest expense |
| (41,579) | | | (41,579) | |||||||||||||||
Foreign exchange gain (loss) |
343 | (150) | (116) | | 77 | |||||||||||||||
Income tax (expense) benefit |
71 | | (18,748) | | (18,677) | |||||||||||||||
Equity in earnings of consolidated subsidiaries |
547,966 | 580,880 | | (1,128,846) | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME (LOSS) |
$ | 534,154 | $ | 536,479 | $ | 592,367 | $ | (1,128,846) | $ | 534,154 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Unrealized gains on investments arising during the period net of applicable deferred income tax expense of $81 |
150 | | 150 | (150) | 150 | |||||||||||||||
Reclassification adjustment for net realized investment gains included in net income, net of applicable income tax |
(13,249) | | (13,249) | 13,249 | (13,249) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive loss |
(13,099) | | (13,099) | 13,099 | (13,099) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
COMPREHENSIVE INCOME (LOSS) |
$ | 521,055 | $ | 536,479 | $ | 579,268 | $ | (1,115,747) | $ | 521,055 | ||||||||||
|
|
|
|
|
|
|
|
|
|
25
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Unaudited Condensed Consolidating Cash Flows:
Nine Months Ended September 30, 2013 |
Allied World Switzerland (Parent Guarantor) |
Allied World Bermuda (Subsidiary Issuer) |
Other Allied World Subsidiaries |
Consolidating Adjustments |
Allied World Switzerland Consolidated |
|||||||||||||||
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES |
$ | 177,859 | $ | (2,936) | $ | 157,127 | $ | | $ | 332,050 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: |
||||||||||||||||||||
Purchases trading securities |
| | (4,955,817) | | (4,955,817) | |||||||||||||||
Purchases of other invested assets |
| | (211,501) | | (211,501) | |||||||||||||||
Sales of available for sale securities |
| | | | | |||||||||||||||
Sales of trading securities |
| | 5,137,280 | | 5,137,280 | |||||||||||||||
Sales of other invested assets |
| | 189,155 | | 189,155 | |||||||||||||||
Other |
| | (78,203) | | (78,203) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used in) investing activities |
| | 80,914 | | 80,914 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: |
||||||||||||||||||||
Dividends paid - partial par value reduction |
(12,981) | | | | (12,981) | |||||||||||||||
Dividends paid |
(17,117) | | | | (17,117) | |||||||||||||||
Proceeds from the exercise of stock options |
8,465 | | | | 8,465 | |||||||||||||||
Share repurchases |
(120,163) | | | | (120,163) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used in) financing activities |
(141,796) | | | | (141,796) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
36,063 | (2,936) | 238,041 | | 271,168 | |||||||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
19,997 | 11,324 | 650,558 | | 681,879 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 56,060 | $ | 8,388 | $ | 888,599 | $ | | $ | 953,047 | ||||||||||
|
|
|
|
|
|
|
|
|
|
26
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Nine Months Ended September 30, 2012 |
Allied World Switzerland (Parent Guarantor) |
Allied World Bermuda (Subsidiary Issuer) |
Other Allied World Subsidiaries |
Consolidating Adjustments |
Allied World Switzerland Consolidated |
|||||||||||||||
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: |
$ | 162,141 | $ | 687 | $ | 336,824 | $ | | $ | 499,652 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: |
||||||||||||||||||||
Purchases of available for sale securities |
| | | | | |||||||||||||||
Purchases of trading securities |
| | (6,328,719) | | (6,328,719) | |||||||||||||||
Purchases of other invested assets |
| | (52,578) | | (52,578) | |||||||||||||||
Sales of available for sale securities |
| | 215,318 | | 215,318 | |||||||||||||||
Sales of trading securities |
| | 5,778,138 | | 5,778,138 | |||||||||||||||
Sales of other invested assets |
| | 110,429 | | 110,429 | |||||||||||||||
Other |
| | 33,644 | | 33,644 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used in) investing activities |
| | (243,768) | | (243,768) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: |
||||||||||||||||||||
Partial par value reduction |
(54,721) | | | | (54,721) | |||||||||||||||
Proceeds from the exercise of stock options |
9,104 | | | | 9,104 | |||||||||||||||
Share repurchases |
(204,746) | | | | (204,746) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used in) financing activities |
(250,363) | | | | (250,363) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(88,222) | 687 | 93,056 | | 5,521 | |||||||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
112,672 | 8,886 | 512,438 | | 633,996 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 24,450 | $ | 9,573 | $ | 605,494 | $ | | $ | 639,517 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Notes to Parent Company Condensed Financial Information
a) Dividends
Allied World Switzerland received cash dividends from its subsidiaries of $237,000 and $285,000 for the nine months ended September 30, 2013 and 2012, respectively. Such dividends are included in cash flows provided by (used in) operating activities in the unaudited condensed consolidating cash flows.
14. SUBSEQUENT EVENTS
On October 3, 2013, the Company paid a quarterly dividend of $0.50 per share to shareholders of record on September 24, 2013.
27
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q. References in this Form 10-Q to the terms we, us, our, the Company or other similar terms mean the consolidated operations of Allied World Assurance Company Holdings, AG, a Swiss holding company, and our consolidated subsidiaries, unless the context requires otherwise. References in this Form 10-Q to the term Allied World Switzerland or Holdings means only Allied World Assurance Company Holdings, AG. References to Allied World Bermuda mean only Allied World Assurance Company Holdings, Ltd, a Bermuda holding company. References to our insurance subsidiaries may include our reinsurance subsidiaries. References in this Form 10-Q to $ are to the lawful currency of the United States and to CHF are to the lawful currency of Switzerland. References in this Form 10-Q to Holdings common shares mean its registered voting shares.
Note on Forward-Looking Statement
This Form 10-Q and other publicly available documents may include, and our officers and representatives may from time to time make, projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to management, operations, products and services, and assumptions underlying these projections and statements. These projections and statements are forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 and are not historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These projections and statements may address, among other things, our strategy for growth, product development, financial results and reserves. Actual results and financial condition may differ, possibly materially, from these projections and statements and therefore you should not place undue reliance on them. Factors that could cause our actual results to differ, possibly materially, from those in the specific projections and statements are discussed throughout this Managements Discussion and Analysis of Financial Condition and Results of Operations and in Risk Factors in Item 1A. of Part I of our 2012 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC) on February 26, 2013 (the 2012 Form 10-K). We are under no obligation (and expressly disclaim any such obligation) to update or revise any forward-looking statement that may be made from time to time, whether as a result of new information, future developments or otherwise.
Overview
Our Business
We write a diversified portfolio of property and casualty insurance and reinsurance internationally through our subsidiaries and branches based in Bermuda, Europe, Hong Kong, Singapore and the United States as well as our Lloyds Syndicate 2232. We manage our business through three operating segments: U.S. insurance, international insurance and reinsurance. As of September 30, 2013, we had approximately $12.4 billion of total assets, $3.4 billion of total shareholders equity and $4.2 billion of total capital, which includes shareholders equity and senior notes.
During the three months ended September 30, 2013, we continued to see rate improvement during the quarter on some lines of business in certain jurisdictions, particularly in our U.S. insurance segment. Rates on property lines, across our segments, have begun to flatten, particularly those accounts that had experienced loss activity in the prior year. We believe that there are opportunities where certain products have attractive premium rates and that the expanded breadth of our operations allows us to target those classes of business.
Our consolidated gross premiums written increased by $76.5 million, or 15.2%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. Our net income decreased by $96.8 million to $122.8 million compared to the three months ended September 30, 2012. The decrease was due to lower net realized investment gains (losses) of $122.3 million for the three months ended September 30, 2013 compared to the same period in 2012, partially offset by an increase in underwriting income of $27.7 million.
Our consolidated gross premiums written increased by $351.0 million, or 19.2%, for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. Our net income decreased by $254.2 million to $280.0 million compared to the nine months ended September 30, 2012. The decrease was due to lower net realized investment gains (losses) of $300.1 million for the nine months ended September 30, 2013 compared to the same period in 2012, partially offset by an increase in underwriting income of $60.4 million.
28
Financial Highlights
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
($ in millions except share, per share and percentage data) | ||||||||||||||||
Gross premiums written |
$ | 580.9 | $ | 504.4 | $ | 2,183.2 | $ | 1,832.2 | ||||||||
Underwriting income |
80.1 | 52.4 | 235.8 | 175.4 | ||||||||||||
Net income |
122.8 | 219.6 | 280.0 | 534.2 | ||||||||||||
Operating income |
101.8 | 79.2 | 289.5 | 258.0 | ||||||||||||
Basic earnings per share: |
||||||||||||||||
Net income |
$ | 3.61 | $ | 6.16 | $ | 8.15 | $ | 14.68 | ||||||||
Operating income |
$ | 2.99 | $ | 2.22 | $ | 8.43 | $ | 7.09 | ||||||||
Diluted earnings per share: |
||||||||||||||||
Net income |
$ | 3.54 | $ | 6.00 | $ | 7.97 | $ | 14.28 | ||||||||
Operating income |
$ | 2.93 | $ | 2.16 | $ | 8.24 | $ | 6.90 | ||||||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
33,991,359 | 35,652,768 | 34,340,227 | 36,379,514 | ||||||||||||
Diluted |
34,728,193 | 36,616,734 | 35,131,092 | 37,393,093 | ||||||||||||
Basic book value per common share |
$ | 101.85 | $ | 97.05 | $ | 101.85 | $ | 97.05 | ||||||||
Diluted book value per common share |
$ | 99.16 | $ | 93.82 | $ | 99.16 | $ | 93.82 | ||||||||
Annualized return on average equity (ROAE), net income |
14.4% | 26.2% | 11.0% | 21.7% | ||||||||||||
Annualized ROAE, operating income |
11.9% | 9.4% | 11.4% | 10.5% |
Non-GAAP Financial Measures
In presenting the companys results, management has included and discussed certain non-GAAP financial measures, as such term is defined in Item 10(e) of Regulation S-K promulgated by the SEC. Management believes that these non-GAAP measures, which may be defined differently by other companies, better explain the companys results of operations in a manner that allows for a more complete understanding of the underlying trends in the companys business. However, these measures should not be viewed as a substitute for those determined in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).
Operating income and operating income per share
Operating income is an internal performance measure used in the management of our operations and represents after-tax operational results excluding, as applicable, net realized investment gains or losses, net impairment charges recognized in earnings, net foreign exchange gain or loss, and other non-recurring items. We exclude net realized investment gains or losses, net impairment charges recognized in earnings, net foreign exchange gain or loss and any other non-recurring items from our calculation of operating income because these amounts are heavily influenced by and fluctuate in part according to the availability of market opportunities and other factors. In addition to presenting net income determined in accordance with U.S. GAAP, we believe that showing operating income enables investors, analysts, rating agencies and other users of our financial information to more easily analyze our results of operations and our underlying business performance. Operating income should not be viewed as a substitute for U.S. GAAP net income. The following is a reconciliation of operating income to its most closely related U.S. GAAP measure, net income.
29
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
($ in millions, except share, per share and percentage data) | ||||||||||||||||
Net income |
$ | 122.8 | $ | 219.6 | $ | 280.0 | $ | 534.2 | ||||||||
Add after tax effect of: |
||||||||||||||||
Net realized investment (gains) losses |
(25.4) | (141.4) | 2.2 | (276.1) | ||||||||||||
Foreign exchange loss (gain) |
4.4 | 1.0 | 7.3 | (0.1) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
$ | 101.8 | $ | 79.2 | $ | 289.5 | $ | 258.0 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic per share data: |
||||||||||||||||
Net income |
$ | 3.61 | $ | 6.16 | $ | 8.15 | $ | 14.68 | ||||||||
Add after tax effect of: |
||||||||||||||||
Net realized investment (gains) losses |
(0.75) | (3.97) | 0.06 | (7.59) | ||||||||||||
Foreign exchange loss (gain) |
0.13 | 0.03 | 0.22 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
$ | 2.99 | $ | 2.22 | $ | 8.43 | $ | 7.09 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted per share data: |
||||||||||||||||
Net income |
$ | 3.54 | $ | 6.00 | $ | 7.97 | $ | 14.28 | ||||||||
Add after tax effect of: |
||||||||||||||||
Net realized investment (gains) losses |
(0.73) | (3.86) | 0.06 | (7.38) | ||||||||||||
Foreign exchange loss (gain) |
0.12 | 0.02 | 0.21 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
$ | 2.93 | $ | 2.16 | $ | 8.24 | $ | 6.90 | ||||||||
|
|
|
|
|
|
|
|
Diluted book value per share
We have included diluted book value per share because it takes into account the effect of dilutive securities; therefore, we believe it is an important measure of calculating shareholder returns.
As of September 30, | ||||||||
2013 | 2012 | |||||||
($ in millions, except share and per share data) |
||||||||
Price per share at period end |
$ | 99.39 | $ | 77.25 | ||||
Total shareholders equity |
$ | 3,443.9 | $ | 3,435.8 | ||||
Basic common shares outstanding |
33,814,920 | 35,402,558 | ||||||
Add: |
||||||||
Unvested restricted stock units |
83,240 | 179,986 | ||||||
Performance based equity awards |
270,853 | 508,130 | ||||||
Employee share purchase plan |
15,320 | 5,925 | ||||||
Dilutive options outstanding |
1,050,832 | 1,306,837 | ||||||
Weighted average exercise price per share |
$ | 47.77 | $ | 46.14 | ||||
Deduct: |
||||||||
Options bought back via treasury method |
(505,057) | (780,502) | ||||||
|
|
|
|
|||||
Common shares and common share equivalents outstanding |
34,730,108 | 36,622,934 | ||||||
Basic book value per common share |
$ | 101.85 | $ | 97.05 | ||||
Diluted book value per common share |
$ | 99.16 | $ | 93.82 |
Annualized return on average equity
Annualized return on average shareholders equity (ROAE) is calculated using average shareholders equity, excluding the average after tax unrealized gains or losses on investments. We present ROAE as a measure that is commonly recognized as a standard of performance by investors, analysts, rating agencies and other users of our financial information.
30
Annualized operating return on average shareholders equity is calculated using operating income and average shareholders equity, excluding the average after tax unrealized gains or losses on investments.
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
($ in millions except percentage data) | ||||||||||||||||
Opening shareholders equity |
$ | 3,373.2 | $ | 3,283.9 | $ | 3,326.3 | $ | 3,149.0 | ||||||||
Deduct: accumulated other comprehensive income |
- | (1.4) | - | (14.5) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Adjusted opening shareholders equity |
$ | 3,373.2 | $ | 3,282.5 | $ | 3,326.3 | $ | 3,134.5 | ||||||||
Closing shareholders equity |
$ | 3,443.9 | $ | 3,435.8 | $ | 3,443.9 | $ | 3,435.8 | ||||||||
Deduct: accumulated other comprehensive income |
- | (1.4) | - | (1.4) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Adjusted closing shareholders equity |
$ | 3,443.9 | $ | 3,434.4 | $ | 3,443.9 | $ | 3,434.4 | ||||||||
Average shareholders equity |
$ | 3,408.6 | $ | 3,358.4 | $ | 3,385.1 | $ | 3,284.5 | ||||||||
Net income available to shareholders |
$ | 122.8 | $ | 219.6 | $ | 280.0 | $ | 534.2 | ||||||||
Annualized return on average shareholders equity |
14.4% | 26.2% | 11.0% | 21.7% | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income available to shareholders |
$ | 101.8 | $ | 79.2 | $ | 289.5 | $ | 258.0 | ||||||||
Annualized return on average shareholders equity |
11.9% | 9.4% | 11.4% | 10.5% | ||||||||||||
|
|
|
|
|
|
|
|
Relevant Factors
Revenues
We derive our revenues primarily from premiums on our insurance policies and reinsurance contracts, net of any reinsurance or retrocessional coverage purchased. Insurance and reinsurance premiums are a function of the amounts and types of policies and contracts we write, as well as prevailing market prices. Our prices are determined before our ultimate costs, which may extend far into the future, are known. In addition, our revenues include income generated from our investment portfolio, consisting of net investment income and net realized investment gains or losses. Investment income is principally derived from interest and dividends earned on investments, as well as distributed and undistributed income from equity method investments, partially offset by investment management expenses and fees paid to our custodian bank. Net realized investment gains or losses include gains or losses from the sale of investments, as well as the change in the fair value of investments that we mark-to-market through net income.
Expenses
Our expenses consist largely of net losses and loss expenses, acquisition costs and general and administrative expenses. Net losses and loss expenses incurred are comprised of three main components:
| losses paid, which are actual cash payments to insureds and reinsureds, net of recoveries from reinsurers; |
| outstanding loss or case reserves, which represent managements best estimate of the likely settlement amount for known claims, less the portion that can be recovered from reinsurers; and |
| reserves for losses incurred but not reported, or IBNR, which are reserves (in addition to case reserves) established by us that we believe are needed for the future settlement of claims. The portion recoverable from reinsurers is deducted from the gross estimated loss. |
Acquisition costs are comprised of commissions, brokerage fees, insurance taxes and other acquisition related costs such as profit commissions. Commissions and brokerage fees are usually calculated as a percentage of premiums and depend on the market and line of business. Acquisition costs are reported after (1) deducting commissions received on ceded reinsurance, (2) deducting the part of deferred acquisition costs relating to the successful acquisition of new and renewal insurance and reinsurance contracts and (3) including the amortization of previously deferred acquisition costs.
31
General and administrative expenses include personnel expenses including stock-based compensation expense, rent expense, professional fees, information technology costs and other general operating expenses.
Ratios
Management measures results for each segment on the basis of the loss and loss expense ratio, acquisition cost ratio, general and administrative expense ratio, expense ratio and the combined ratio. Because we do not manage our assets by segment, investment income, interest expense and total assets are not allocated to individual reportable segments. General and administrative expenses are allocated to segments based on various factors, including staff count and each segments proportional share of gross premiums written. The loss and loss expense ratio is derived by dividing net losses and loss expenses by net premiums earned. The acquisition cost ratio is derived by dividing acquisition costs by net premiums earned. The general and administrative expense ratio is derived by dividing general and administrative expenses by net premiums earned. The expense ratio is the sum of the acquisition cost ratio and the general and administrative expense ratio. The combined ratio is the sum of the loss and loss expense ratio, the acquisition cost ratio and the general and administrative expense ratio.
Critical Accounting Policies
It is important to understand our accounting policies in order to understand our financial position and results of operations. Our unaudited condensed consolidated financial statements reflect determinations that are inherently subjective in nature and require management to make assumptions and best estimates to determine the reported values. If events or other factors cause actual results to differ materially from managements underlying assumptions or estimates, there could be a material adverse effect on our financial condition or results of operations. We believe that some of the more critical judgments in the areas of accounting estimates and assumptions that affect our financial condition and results of operations are related to reserves for losses and loss expenses, reinsurance recoverables, premiums and acquisition costs, valuation of financial instruments and goodwill and other intangible asset impairment valuation. For a detailed discussion of our critical accounting policies, please refer to our 2012 Form 10-K. There were no material changes in the application of our critical accounting estimates subsequent to that report.
32
Results of Operations
The following table sets forth our selected consolidated statement of operations data for each of the periods indicated.
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
($ in millions) | ||||||||||||||||
Revenues |
||||||||||||||||
Gross premiums written |
$ | 580.9 | $ | 504.4 | $ | 2,183.2 | $ | 1,832.2 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums written |
$ | 453.1 | $ | 391.5 | $ | 1,729.4 | $ | 1,475.2 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net premiums earned |
$ | 510.8 | $ | 441.0 | $ | 1,481.3 | $ | 1,272.7 | ||||||||
Net investment income |
39.3 | 39.1 | 110.3 | 128.8 | ||||||||||||
Net realized investment gains (losses) |
27.5 | 149.8 | (8.1) | 292.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 577.6 | $ | 629.9 | $ | 1,583.5 | $ | 1,693.5 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Expenses |
||||||||||||||||
Net losses and loss expenses |
$ | 277.0 | $ | 258.9 | $ | 807.3 | $ | 724.5 | ||||||||
Acquisition costs |
65.1 | 51.1 | 186.4 | 149.8 | ||||||||||||
General and administrative expenses |
88.6 | 78.6 | 251.8 | 223.0 | ||||||||||||
Amortization of intangible assets |
0.7 | 0.6 | 1.9 | 1.9 | ||||||||||||
Interest expense |
14.1 | 13.8 | 42.4 | 41.6 | ||||||||||||
Foreign exchange loss (gain) |
4.4 | 1.0 | 7.4 | (0.1) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 449.9 | $ | 404.0 | $ | 1,297.2 | $ | 1,140.7 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
127.7 | 225.9 | 286.3 | 552.8 | ||||||||||||
Income tax expense |
4.9 | 6.3 | 6.3 | 18.6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 122.8 | $ | 219.6 | $ | 280.0 | $ | 534.2 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Ratios |
||||||||||||||||
Loss and loss expense ratio |
54.2% | 58.7% | 54.5% | 56.9% | ||||||||||||
Acquisition cost ratio |
12.7% | 11.6% | 12.6% | 11.8% | ||||||||||||
General and administrative expense ratio |
17.3% | 17.8% | 17.0% | 17.5% | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Expense ratio |
30.0% | 29.4% | 29.6% | 29.3% | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Combined ratio |
84.2% | 88.1% | 84.1% | 86.2% | ||||||||||||
|
|
|
|
|
|
|
|
Comparison of Three Months Ended September 30, 2013 and 2012
Premiums
Gross premiums written increased by $76.5 million, or 15.2%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The overall increase in gross premiums written was primarily the result of the following:
| U.S. insurance: Gross premiums written increased by $45.6 million, or 17.3%. The increase in gross premiums written was primarily due to new business across existing lines that added $102.9 million during the quarter combined with premium rate increases in all lines of business. The increase in new business for the quarter was primarily driven by our general casualty, programs, and inland marine lines of business. Our new lines of business, primary construction and surety, contributed a further $8.1 million in new business; |
| International insurance: Gross premiums written increased by $11.6 million, or 9.6%. The increase was primarily due to new business written of $13.1 million in our new aviation line of business. Effective October 1, 2013, we acquired the renewal rights to a book of aviation business from Markel International that was written through Lloyds Syndicate 1400 and Markel Europe plc. In conjunction with the renewal rights agreement, in August we assumed the unexpired inforce aviation business from Markel International, which resulted in gross premiums written of $13.1 million this quarter. This business encompasses |
33
airlines, aerospace (primarily airports and aviation products) and general aviation classes. In addition, we had continued growth in our professional liability line of business, driven by the expansion of new initiatives. However, this growth was partially offset by $7.1 million of non-recurring premiums in our trade credit line of business recorded in 2012; and |
| Reinsurance: Gross premiums written increased by $19.3 million, or 16.1%. The increase was driven by new business in the specialty lines primarily written out of Asia and Latin America, combined with increased participations on renewing business and rate increases for certain lines of business. |
The table below illustrates our gross premiums written by underwriter location for each of the periods indicated.
Three Months Ended September 30, |
Dollar | Percentage | ||||||||||||||
2013 | 2012 | Change | Change | |||||||||||||
($ in millions) | ||||||||||||||||
United States |
$ | 377.6 | $ | 312.9 | $ | 64.7 | 20.7% | |||||||||
Bermuda |
111.1 | 108.9 | 2.2 | 2.0% | ||||||||||||
Europe |
51.9 | 46.8 | 5.1 | 10.9% | ||||||||||||
Singapore |
35.5 | 31.9 | 3.6 | 11.3% | ||||||||||||
Hong Kong |
4.8 | 3.9 | 0.9 | 23.1% | ||||||||||||
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$ | 580.9 | $ | 504.4 | $ | 76.5 | 15.2% | ||||||||||
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Net premiums written increased by $61.6 million, or 15.7%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The increase in net premiums written was due to the increase in gross premiums written. The difference between gross and net premiums written is the cost to us of purchasing reinsurance coverage, including the cost of property catastrophe reinsurance coverage. We ceded 22.0% of gross premiums written for the three months ended September 30, 2013 compared to 22.4% for the same period in 2012.
Net premiums earned increased by $69.8 million, or 15.8%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012 as a result of higher net premiums written in 2012 and 2013.
We evaluate our business by segment, distinguishing between U.S. insurance, international insurance and reinsurance. The following table illustrates the mix of our business on both a gross premiums written and net premiums earned basis.
Gross Premiums Written | Net Premiums Earned | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
U.S. insurance |
53.1% | 52.2% | 40.7% | 39.5% | ||||||||||||
International insurance |
22.9% | 24.0% | 17.1% | 19.3% | ||||||||||||
Reinsurance |
24.0% | 23.8% | 42.2% | 41.2% | ||||||||||||
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Total |
100.0% | 100.0% | 100.0% | 100.0% | ||||||||||||
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Net Investment Income
Net investment income increased by $0.2 million, or 0.5%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The increase was due to an increase in the distributed and undistributed earnings of our equity method investments that we invested in at the end of 2012, as well as higher income from our hedge fund and private equity investments. This increase was partially offset by lower net investment income for our fixed maturity investments as we increased the allocation of our investment portfolio to other invested assets that contribute to our total return but carry little or no current yield. The annualized period book yield of the investment portfolio for the three months ended September 30, 2013 and 2012 was 1.9% and 1.9%, respectively.
As of September 30, 2013, we held 10.3% of our total investments and cash equivalents in other invested assets compared to 6.4% as of September 30, 2012.
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Investment management expenses of $4.1 million and $3.7 million were incurred during the three months ended September 30, 2013 and 2012, respectively.
As of September 30, 2013, approximately 89.1% of our fixed income investments consisted of investment grade securities. As of September 30, 2013 and December 31, 2012, the average credit rating of our fixed income portfolio was AA- as rated by Standard & Poors.
Realized Investment Gains (Losses)
Net realized investment gains (losses) were comprised of the following:
Three Months Ended September 30, |
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2013 | 2012 | |||||||
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Net realized gains (losses) on sale: |
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Fixed maturity investments, trading |
$ | (4.8) | $ | 12.9 | ||||
Equity securities, trading |
13.9 | 7.5 | ||||||
Other invested assets: hedge funds and private equity, trading |
2.1 | 0.2 | ||||||
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Total net realized gains on sale |
11.2 | 20.6 | ||||||
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Net realized and unrealized losses on derivatives |
(4.2) | (1.0) | ||||||
Mark-to-market gains (losses): |
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Fixed maturity investments, trading |
30.4 | 99.8 | ||||||
Equity securities, trading |
(17.2) | 18.9 | ||||||
Other invested assets: hedge funds and private equity, trading |
7.3 | 11.5 | ||||||
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Total mark-to-market gains |
20.5 | 130.2 | ||||||
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Net realized investment gains |
$ | 27.5 | $ | 149.8 | ||||
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The total return of our investment portfolio was 0.8% and 2.2% for the three months ended September 30, 2013 and 2012, respectively. The decrease in total return is primarily due to lower mark-to-market gains on our fixed maturity, mark-to-market losses on our equity securities and lower realized gains from the sale of investments. The lower mark-to-market gains on our fixed maturity securities were caused by modest increases in interest rates on our fixed income portfolio during the three months ended September 30, 2013 compared to the same period in 2012. The rising interest rate environment also negatively impacted our dividend focused equity portfolio, which underperformed the S&P 500 for the quarter.
Net Losses and Loss Expenses
Net losses and loss expenses increased by $18.1 million, or 7.0%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The loss and loss expense ratio decreased by 4.5 percentage points for the same period. The increase in net loss and loss expenses was due to growth in net premiums earned, partially offset by higher net favorable prior year reserve development in 2013.
Excluding the prior year reserve development, the loss and loss expense ratios would have been 66.2% and 71.4% for the three months ended September 30, 2013 and 2012, respectively. The decrease in the loss and loss expense ratio of 5.2 points was primarily due to fewer current year reported large losses in the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The reported large losses were $25.2 million for the three months ended September 30, 2013 compared to $53.7 million for the same period in 2012. The reported large losses in the three months ended September 30, 2012 included approximately $40.0 million of crop reinsurance-related losses and loss expenses related to drought conditions across much of the United States and $5.0 million for Hurricane Isaac.
We classify catastrophe losses as those losses that result from a major singular event or series of similar events (such as tornadoes) which are assigned a catastrophe loss number by industry data services, where our consolidated losses are expected to be at least $10 million per loss event or series of similar events and where we believe it is important to our investors understanding of our operations.
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Three Months Ended September 30, 2013 |
Three Months Ended September 30, 2012 |
Dollar | Change in Percentage | |||||||||||||||||||||||
Amount | % of NPE (1) | Amount | % of NPE (1) | Change | Points | |||||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||||
Non-catastrophe |
$ | 338.4 | 66.2 | % | $ | 310.1 | 70.3 | % | $ | 28.3 | (4.1) | Pts | ||||||||||||||
Property catastrophe |
| | 5.0 | 1.1 | (5.0) | (1.1) | ||||||||||||||||||||
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Current period |
338.4 | 66.2 | 315.1 | 71.4 | 23.3 | (5.2) | ||||||||||||||||||||
Prior period |
(61.4) | (12.0) | (56.2) | (12.7) | (5.2) | 0.7 | ||||||||||||||||||||
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Net losses and loss expenses |
$ | 277.0 | 54.2 | % | $ | 258.9 | 58.7 | % | $ | 18.1 | (4.5) | Pts | ||||||||||||||
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(1) | NPE means net premiums earned. |
We recorded net favorable reserve development related to prior years of $61.4 million during the three months ended September 30, 2013 compared to net favorable reserve development of $56.2 million for the three months ended September 30, 2012, as shown in the tables below.
(Favorable) and Unfavorable Loss Reserve Development by Loss Year | ||||||||||||||||||||||||||||||||||||||||||||
For the Three Months Ended September 30, 2013 | ||||||||||||||||||||||||||||||||||||||||||||
2003 and Prior |
2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | Total | ||||||||||||||||||||||||||||||||||
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U.S. insurance |
$ | (3.0) | $ | (0.6) | $ | (1.1) | $ | (6.1) | $ | (5.5) | $ | (2.9) | $ | (3.5) | $ | (4.8) | $ | 13.2 | $ | 18.1 | $ | 3.8 | ||||||||||||||||||||||
International insurance |
0.2 | (1.2) | 3.2 | (4.0) | (8.6) | (4.7) | (5.9) | (4.1) | (2.1) | (2.5) | (29.7) | |||||||||||||||||||||||||||||||||
Reinsurance |
(1.6) | (2.4) | 1.5 | | 0.2 | (2.1) | (2.0) | (2.6) | (12.1) | (14.4) | (35.5) | |||||||||||||||||||||||||||||||||
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$ | (4.4) | $ | (4.2) | $ | 3.6 | $ | (10.1) | $ | (13.9) | $ | (9.7) | $ | (11.4) | $ | (11.5) | $ | (1.0) | $ | 1.2 | $ | (61.4) | |||||||||||||||||||||||
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The unfavorable reserve development for the 2011 loss year for our U.S. insurance segment was primarily due to adverse development on reported claims in our healthcare and errors and omissions (E&O) products. The unfavorable reserve development for the 2012 loss year for our U.S. insurance segment was primarily due to adverse development on reported claims in our healthcare, private/not for profit directors and officers (D&O) and lawyers E&O. In response to the underwriting experience in these lines, we continue to take rate action, as well as make changes to policy terms and conditions, resulting in flat or reduced gross premiums written but reduced exposures.
The additions to the 2011 and 2012 loss years noted above are consistent with our practice of addressing unfavorable loss emergence early in our long-tail lines of business. We tend to recognize favorable loss emergence more slowly in our long-tail lines once actual loss emergence and data provides greater confidence around the adequacy of ultimate estimates.
The favorable reserve development for the reinsurance segment was primarily related to our property reinsurance line of business, and included favorable reserve development related to recent catastrophic events that occurred in 2010 through 2012.
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The following table shows the net favorable reserve development by loss year for each of our segments for the three months ended September 30, 2012.
(Favorable) and Unfavorable Loss Reserve Development by Loss Year | ||||||||||||||||||||||||||||||||||||||||
For the Three Months Ended September 30, 2012 | ||||||||||||||||||||||||||||||||||||||||