e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-32938
ALLIED WORLD ASSURANCE COMPANY
HOLDINGS, AG
(Exact Name of Registrant as
Specified in Its Charter)
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Switzerland
(State or Other Jurisdiction
of
Incorporation or Organization)
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98-0681223
(I.R.S. Employer
Identification No.)
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Lindenstrasse 8, 6340 Baar, Zug, Switzerland
(Address of Principal Executive
Offices and Zip Code)
41-41-768-1080
(Registrants Telephone
Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Shares, par value CHF 15.00 per share
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New York Stock Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 o
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 o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in the definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
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):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(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
Act). Yes o No þ
The aggregate market value of voting and non-voting common
shares held by non-affiliates of the registrant as of
June 30, 2010 (the last business day of the
registrants most recently completed second fiscal quarter)
was approximately $2.3 billion based on the closing sale
price of the registrants common shares on the New York
Stock Exchange on that date.
As of February 21, 2011, 38,020,802 common shares were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The registrants definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to
Regulation 14A with respect to the annual general meeting
of the shareholders of the registrant scheduled to be held on
May 5, 2011 is incorporated in Part III of this
Form 10-K.
ALLIED
WORLD ASSURANCE COMPANY HOLDINGS, AG
TABLE OF
CONTENTS
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PART I
References in this Annual Report on
Form 10-K
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-K
to the terms Allied World Switzerland or
Holdings means only Allied World Assurance Company
Holdings, AG. References to our insurance
subsidiaries may include our reinsurance subsidiaries.
References in this
Form 10-K
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-K
to Holdings common shares means its registered
voting shares and non-voting participation certificates. For
your convenience, we have included a glossary beginning on
page 53 of selected insurance and reinsurance terms.
Overview
We are a Swiss-based specialty insurance and reinsurance company
that underwrites a diversified portfolio of property and
casualty lines of business through offices located in Bermuda,
Hong Kong, Ireland, Singapore, Switzerland, the United Kingdom
and the United States. For the year ended December 31,
2010, our U.S. insurance, international insurance and
reinsurance segments accounted for 41.5%, 28.7% and 29.8%,
respectively, of our total gross premiums written of
$1,758.4 million. As of December 31, 2010, we had
$10,427.6 million of total assets and $3,075.8 million
of shareholders equity.
We were formed in Bermuda in November 2001. On December 1,
2010, Holdings became the ultimate parent company of Allied
World Assurance Company Holdings, Ltd, the former
publicly-traded Bermuda holding company (Allied World
Bermuda), and its subsidiaries as a result of a
redomestication effected pursuant to a scheme of arrangement
under Bermuda law (the Redomestication).
Since our formation, we have focused primarily on the direct
insurance markets. We offer our clients and producers
significant capacity in both the direct property and casualty
insurance markets as well as the reinsurance market.
Internationally, we first established a presence in Europe when
Allied World Assurance Company (Europe) Limited was approved to
carry on business in the European Union (EU) from
its office in Ireland in October 2002 and from a branch office
in London in May 2003. Allied World Assurance Company
(Reinsurance) Limited was approved to write reinsurance in the
EU from its office in Ireland in July 2003 and from a branch
office in London, England in August 2004. In October 2008, we
expanded our European presence when Allied World Assurance
Company (Reinsurance) Limited opened a branch office in Zug,
Switzerland to further penetrate the European market.
In July 2002, we established a presence in the United States
when we acquired two insurance companies, Allied World Assurance
Company (U.S.) Inc. and Allied World National Assurance Company.
In recent years we have made substantial investments to expand
our North American business, which has grown significantly since
2009 and which we expect will continue to grow in size and
importance in the coming years. In February 2008, we acquired a
U.S. reinsurance company we subsequently renamed Allied
World Reinsurance Company, and we write our
U.S. reinsurance business through this company. In October
2008, we acquired Darwin Professional Underwriters, Inc. and its
subsidiaries (collectively, Darwin) to further
expand our U.S. insurance platform. We currently have nine
offices in the United States and we have recently become
licensed in Canada.
In early 2010, we received approval from Lloyds of London
(Lloyds) to establish a syndicate at
Lloyds. Our new Lloyds syndicate, Syndicate 2232,
commenced underwriting in June 2010. Syndicate 2232 is managed
by Capita Managing Agency Limited, a subsidiary of The Capita
Group PLC, which is authorized by the Financial Services
Authority in the United Kingdom (the FSA). In July
2010, we received approval from the Monetary Authority of
Singapore and Lloyds Asia to register and operate a
service company, Capita 2232 Services Pte. Ltd. As part of the
Lloyds Asia platform, the service company underwrites
exclusively on behalf of Syndicate 2232. Syndicate 2232, via the
service company, offers a broad range of insurance and
reinsurance treaty products from
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Singapore, including property, casualty and specialty lines, to
clients in the Asia Pacific, Middle East and Africa regions.
Our corporate expansion continued into Asia when Allied World
Assurance Company, Ltd opened branch offices in Hong Kong in
March 2009 and in Singapore in December 2009. We have undergone
significant corporate expansion since our formation, and we now
have 15 offices located in seven different countries.
Available
Information
We maintain a website at www.awac.com. The information on
our website is not incorporated by reference in this Annual
Report on
Form 10-K.
We make available, free of charge through our website, our
financial information, including the information contained in
our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K
filed or furnished pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended (the
Exchange Act), as soon as reasonably practicable
after we electronically file such material with, or furnish such
material to, the U.S. Securities and Exchange Commission
(the SEC). We also make available, free of charge
through our website, our Audit Committee Charter, Compensation
Committee Charter, Investment Committee Charter,
Nominating & Corporate Governance Committee Charter,
Enterprise Risk Committee Charter, Corporate Governance
Guidelines, Code of Ethics for CEO and Senior Financial Officers
and Code of Business Conduct and Ethics. Such information is
also available in print for any shareholder who sends a request
to Allied World Assurance Company Holdings, AG, Lindenstrasse 8,
6340 Baar, Zug, Switzerland, attention: Wesley D. Dupont,
Corporate Secretary, or via
e-mail to
secretary@awac.com. Reports and other information we file with
the SEC may also be viewed at the SECs website at
www.sec.gov or viewed or obtained at the SEC Public Reference
Room at 100 F Street, N.E., Washington, DC 20549.
Information on the operation of the SEC Public Reference Room
may be obtained by calling the SEC at
1-800-SEC-0330.
Our
Strategy
Our business objective is to generate attractive returns on
equity and book value per share growth for our shareholders. We
seek to achieve this objective by executing the following
strategies:
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Capitalize on profitable underwriting
opportunities. Our experienced management and
underwriting teams are positioned to locate and identify
business with attractive risk/reward characteristics. We pursue
a strategy that emphasizes profitability, not market share. Key
elements of this strategy are prudent risk selection,
appropriate pricing and adjusting our business mix to remain
flexible and opportunistic. We seek ways to take advantage of
underwriting opportunities that we believe will be profitable.
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Exercise underwriting and risk management
discipline. We believe we exercise underwriting
and risk management discipline by: (i) maintaining a
diverse spread of risk in our books of business across product
lines and geographic zones; (ii) managing our aggregate
property catastrophe exposure through the application of
sophisticated modeling tools; (iii) monitoring our
exposures on non-property catastrophe coverages;
(iv) adhering to underwriting guidelines across our
business lines; and (v) fostering a culture that focuses on
enterprise risk management and strong internal controls.
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Maintain a conservative investment
strategy. We believe that we follow a
conservative investment strategy designed to emphasize the
preservation of our capital and provide adequate liquidity for
the prompt payment of claims. Our investment portfolio consists
primarily of investment-grade, fixed-maturity securities of
short- to medium-term duration.
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Our premium revenues are generated by operations conducted from
our corporate headquarters in Switzerland and our other offices
in Bermuda, Europe, Hong Kong, Singapore and the United States.
For information concerning our gross premiums written by
geographic location of underwriting office, see Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations Results of
Operations Comparison of Years Ended
December 31, 2010 and 2009 and
Comparison of Years Ended
December 31, 2009 and 2008.
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Our
Operating Segments
We have three business segments: U.S. insurance,
international insurance and reinsurance. These segments and
their respective lines of business and products may, at times,
be subject to different underwriting cycles. We modify our
product strategy as market conditions change and new
opportunities emerge by developing new products, targeting new
industry classes or de-emphasizing existing lines. Our diverse
underwriting skills and flexibility allow us to concentrate on
the business lines where we expect to generate the greatest
returns. Financial data relating to our three segments is
included in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations
and in our consolidated financial statements included in this
report.
The gross premiums written in each segment for the years ended
December 31, 2010, 2009 and 2008 were as follows:
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Year Ended
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Year Ended
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Year Ended
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December 31, 2010
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December 31, 2009
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December 31, 2008
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Gross Premiums Written
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Gross Premiums Written
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Gross Premiums Written
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Operating Segments
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$ (In millions)
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% of Total
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$ (In millions)
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% of Total
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$ (In millions)
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% of Total
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U.S. insurance
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$
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729.3
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41.5
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$
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674.8
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39.8
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$
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320.0
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22.2
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International insurance
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504.9
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28.7
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555.9
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32.8
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695.5
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48.1
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Reinsurance
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524.2
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29.8
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465.6
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27.4
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430.1
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29.7
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Total
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$
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1,758.4
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100.0
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$
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1,696.3
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100.0
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%
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$
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1,445.6
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100.0
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%
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U.S.
Insurance Segment
General
The U.S. insurance segment includes our direct insurance
operations in the United States. Within this segment we provide
an increasingly diverse range of specialty liability products,
with a particular emphasis on coverages for healthcare and
professional liability risks. Additionally, we offer a selection
of direct general casualty insurance and general property
insurance products. We generally target small and middle-market,
non-Fortune 1000 accounts domiciled in North America, including
public entities, private companies and non-profit organizations.
Over the past few years, we have enhanced our
U.S. insurance operating platform, principally through
hiring underwriting talent, through an expanded network of
branch offices located in strategically important locations
across the country and through upgrades to our information
technology platform to accommodate our increasing business
demands. We believe improvements to our operating platform have
allowed us to assume and maintain a leading role as a writer of
primary professional liability and other specialty liability
coverage for small firms. We will continue to seek attractive
opportunities in the U.S. market.
The chart below illustrates the breakdown of the companys
U.S. direct insurance gross premiums written by line of
business for the year ended December 31, 2010.
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Products
and Customer Base
Our casualty operations in the United States focus on insurance
products providing coverage for specialty type risks, such as
professional liability, environmental liability, product
liability and healthcare liability risks, and we offer
commercial general liability products as well. Professional
liability products include policies covering directors and
officers, employment practices and fiduciary liability
insurance. We also offer a diverse mix of errors and omissions
liability coverages for a variety of service providers,
including law firms, technology companies, insurance companies,
insurance agents and brokers, and municipalities. We regularly
assess our product mix, and we evaluate new products and markets
where we believe our underwriting and service will allow us to
differentiate our offerings. During the year ended
December 31, 2010, our professional liability business
accounted for 28.9%, or $211.1 million, of our total gross
premiums written in the U.S. insurance segment.
We also provide both primary and excess liability and other
casualty coverages to the healthcare industry, including
hospitals and hospital systems, managed care organizations and
medical facilities such as home care providers, specialized
surgery and rehabilitation centers, and outpatient clinics. Our
healthcare operations in the U.S. targets small and
middle-market accounts. During the year ended December 31,
2010, our healthcare business accounted for 24.5%, or
$179.8 million, of our total gross premiums written in the
U.S. insurance segment.
In late 2009, we commenced writing environmental liability
business by offering a line of environmental casualty products
covering the pollution and related liability exposures of
general contractors, tank installers, remediation contractors
and others. During the year ended December 31, 2010, our
environmental casualty business accounted for approximately
1.8%, or $13.4 million, of our total gross premiums written
in the U.S. insurance segment.
With respect to general casualty products, we provide both
primary and excess liability coverage, and our focus is on
complex risks in a variety of industries including construction,
real estate, public entities, retailers, manufacturing,
transportation, and finance and insurance services. We also
offer comprehensive workers compensation insurance to employees
working outside of the United States on contracts for agencies
of the U.S. government of foreign operations of
U.S. companies. During the year ended December 31, 2010,
our general casualty business accounted for 20.0%, or
$145.7 million, of our total gross premiums written in the
U.S. insurance segment.
Our U.S. property insurance operations provide direct
coverage of physical property and business interruption coverage
for commercial property risks. We write solely commercial
coverages and concentrate our efforts on primary risk layers of
insurance (as opposed to excess layers), offering meaningful but
limited capacity in these layers. This means that we are
typically part of the first group of insurers that cover a loss
up to a specified limit. Our underwriters are spread among our
locations in the United States because we believe it is
important to be physically present in the major insurance
markets where we compete for business.
We offer general property products from our underwriting
platforms in the United States, and cover risks for retail
chains, real estate, manufacturers, hotels and casinos, and
municipalities. During the year ended December 31, 2010,
our general property business accounted for 10.2%, or
$73.7 million, of our total gross premiums written in the
U.S. insurance segment.
We currently have a total of nine insurance programs in the
United States, offering a variety of products including
professional liability, excess casualty and primary general
liability. We retain responsibility for administration of
claims, although we may opt to outsource claims in selected
situations. Before we enter into a program administration
relationship, we analyze historic loss data associated with the
program business and perform a diligence review of the
administrators underwriting, financial condition and
information technology. In selecting program administrators, we
consider the integrity, experience and reputation of the program
administrator, the availability of reinsurance and the potential
profitability of the business. In order to assure the continuing
integrity of the underwriting and related business operations in
our program business, we conduct additional reviews and audits
of the program administrator on an ongoing basis. To help align
our interests with those of our program administrators, we seek
to include profit incentives based on long-term underwriting
results as a component of their fees. During the year ended
December 31, 2010, our program business accounted for
14.6%, or $105.7 million, of our total gross premiums
written in the U.S. insurance segment.
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For more information concerning our gross premiums written by
line of business in our U.S. insurance segment, see
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations U.S. Insurance
Segment Comparison of Years Ended December 31,
2010 and 2009 and Comparison of Years
Ended December 31, 2009 and 2008.
Distribution
Within our U.S. insurance segment, insurance policies are
placed through a network of over 200 insurance intermediaries,
including excess and surplus lines wholesalers and regional and
national retail brokerage firms. A subset of these
intermediaries also access certain of our U.S. casualty
products via our proprietary i-bind platform that allows
for accelerated quote and bind capabilities through the
Internet. Marsh & McLennan Companies, Inc.
(Marsh) accounted for approximately 10% of gross
premiums written in this segment during 2010.
International
Insurance Segment
General
The international insurance segment includes our established
direct insurance operations outside of the United States.
It includes our operations in Bermuda, Europe and Asia. Our
Bermuda operations underwrite primarily larger, Fortune 1000
casualty and property risks for accounts domiciled in North
America, and have entered into a relationship with Latin
American Underwriters to offer trade credit and political risk
coverages primarily for clients doing business in Latin America
and the Caribbean. Our insurance operations in Europe, with
offices in Dublin and London, have focused on mid-sized to large
European and multi-national companies domiciled outside of North
America, and we are also diversifying towards smaller and
middle-market accounts. In addition, Syndicate 2232 offers
select product lines including international property, general
casualty and professional liability, targeted at key territories
such as countries in Latin America and the Asia Pacific region.
The international insurance segment also encompasses our offices
in Asia that were opened in 2009, including our Hong Kong
office, which underwrites a variety of primary and excess
professional liability lines and general casualty and healthcare
insurance products. Our staff in the international insurance
segment is spread among our locations in Bermuda, Europe and
Asia because we believe it is important that our underwriters be
physically present in the major insurance markets around the
world where we compete for business.
The chart below illustrates the breakdown of the companys
international insurance gross premiums written by line of
business for the year ended December 31, 2010.
Products
and Customer Base
The casualty business within our international insurance segment
focuses primarily on insuring excess layers, with a median
attachment point of $79 million for the large and Fortune
1000 accounts that constitute our core casualty accounts in this
segment. Our international insurance segment utilizes
significant gross limit capacity. Our focus with respect to
general casualty products is on complex risks in a variety of
industries, including manufacturing, energy, chemicals,
transportation, real estate, consumer products, medical and
healthcare services and
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construction. During the year ended December 31, 2010, our
general casualty business accounted for 26.2%, or
$132.3 million, of our total gross premiums written in the
international insurance segment.
We provide professional liability products such as directors and
officers, employment practices, fiduciary and errors and
omissions liability insurance. We offer a diverse mix of
coverages for a number of industries including law firms,
technology companies, financial institutions, insurance
companies and brokers, municipalities, media organizations and
engineering and construction firms. During the year ended
December 31, 2010, our professional liability business
accounted for 31.8%, or $160.7 million, of our total
gross premiums written in the international insurance segment.
Our healthcare underwriters provide risk transfer products to
numerous healthcare institutions, such as hospitals, managed
care organizations and healthcare systems. During the year ended
December 31, 2010, our healthcare business accounted for
11.7%, or $59.3 million, of our total gross premiums
written in the international insurance segment.
We offer general property products from our underwriting
platforms in Bermuda and Europe. Our international property
insurance operations provide direct coverage of physical
property and business interruption coverage for commercial
property risks. We write solely commercial coverages and focus
on the insurance of the primary risk layer. The types of
commercial property risks we cover include retail chains, real
estate, manufacturers, hotels and casinos. During the year ended
December 31, 2010, our general property business (including
energy lines) accounted for 30.3%, or $152.6 million, of
our total gross premiums written in the international insurance
segment.
Because of the large limits we often deploy for casualty and
property business written in the international insurance
segment, we utilize both facultative and treaty reinsurance to
reduce our net exposure. For more information on the reinsurance
we purchase for the property and casualty business written in
international insurance segment, see Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies Ceded Reinsurance. For
more information on our gross premiums written by line of
business in our international insurance segment, see
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations International Insurance
Segment Comparison of Years Ended December 31,
2010 and 2009 and Comparison of Years
Ended December 31, 2009 and 2008.
Distribution
With regard to our international insurance segment, we utilize
our relationships with insurance intermediaries as our principal
method for obtaining business. Our international insurance
segment maintains significant relationships with Marsh, Aon
Corporation (Aon) and Willis Group Holdings
(Willis), which accounted for 30%, 24% and 10%,
respectively, of our gross premiums written in this segment
during 2010.
Reinsurance
Segment
General
Our reinsurance segment includes the reinsurance of property,
general casualty, professional liability, specialty lines and
property catastrophe coverages written by other insurance
companies. In order to diversify our portfolio and complement
our direct insurance business, we target the overall
contribution from reinsurance to be approximately 30% of our
total annual gross premiums written.
We presently write reinsurance on both a treaty and a
facultative basis, targeting several niche markets including
professional liability lines, specialty casualty, property for
U.S. regional insurers, accident and health and to a lesser
extent marine and aviation. Overall, we strive to diversify our
reinsurance portfolio through the appropriate combination of
business lines, ceding source, geography and contract
configuration. Our primary customer focus is on highly-rated
carriers with proven underwriting skills and dependable
operating models.
We determine appropriate pricing either by using pricing models
built or approved by our actuarial staff or by relying on
established pricing set by one of our pricing actuaries for a
specific treaty. Pricing models are generally used for
facultative reinsurance, property catastrophe reinsurance,
property per risk reinsurance and workers
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compensation and personal accident catastrophe reinsurance.
Other types of reinsurance rely on actuarially-established
pricing. During the year ended December 31, 2010, our
reinsurance segment generated gross premiums written of
$524.2 million. On a written basis, our business mix is
more heavily weighted to reinsurance during the first three
months of the year. Our reinsurance segment operates from our
offices in Bermuda, London, New York, Singapore and Switzerland.
The chart below illustrates the breakdown of the companys
reinsurance gross premiums written by line of business for the
year ended December 31, 2010.
Product
Lines and Customer Base
Property, general casualty and professional liability treaty
reinsurance is the principal source of revenue for this segment.
The insurers we reinsure range from single state to nationwide
insurers in the United States as well as specialty carriers or
the specialty divisions of standard lines carriers located
there. For our international treaty unit, our clients include
multi-national insurers, single territory insurers, niche
carriers and Lloyds syndicates. We focus on niche programs
and coverages, frequently sourced from excess and surplus lines
insurers. We established an international treaty unit and began
writing
non-U.S. accounts
in 2003, which spread the segments exposure beyond our
original North American focus. In October 2008, we expanded our
international reach by opening a branch office in Switzerland
that offers property, general casualty and professional
liability products throughout Europe. Syndicate 2232 also offers
international treaty reinsurance. During 2009, we expanded our
reinsurance operations both in Asia, where we opened a branch
office in Singapore that serves as the companys hub for
all classes of treaty reinsurance business for the region, and
in the United States, where we added a property underwriting
team to our reinsurance platform. In December 2010, we launched
a marine and specialty division that will offer reinsurance for
marine, aviation, satellite and crop risks on a global basis. We
target a portfolio of well-rated companies that are highly
knowledgeable in their product lines, have the financial
resources to execute their business plans and are committed to
underwriting discipline throughout the underwriting cycle.
Our North American property reinsurance treaties protect
insurers who write residential, commercial and industrial
accounts where the exposure to loss is chiefly North American.
We emphasize monoline, per risk accounts, which are structured
as either quota share or
excess-of-loss
reinsurance. Monoline reinsurance applies to one kind of
coverage, and per risk reinsurance coverage applies to a
particular risk (for example a building and its contents),
rather than on a per accident, event or aggregate basis. Where
possible, coverage is provided on a losses occurring
basis. We selectively write industry loss warranties where we
believe market opportunities justify the risks. During the year
ended December 31, 2010, our property treaty business
accounted for 25.5%, or $133.8 million of our total gross
premiums written in the reinsurance segment.
Our North American general casualty treaties cover working
layer, intermediate layer and catastrophe exposures. We sell
both quota share and
excess-of-loss
reinsurance. We principally underwrite general liability, auto
liability and commercial excess and umbrella liability for both
admitted and non-admitted companies. During the year ended
December 31, 2010, our North American general casualty
treaty business accounted for 30.6%, or $160.2 million, of
our total gross premiums written in the reinsurance segment.
7
Our North American professional liability treaties cover several
products, primarily directors and officers
liability, but also attorneys malpractice, medical
malpractice, miscellaneous professional classes and
transactional risk liability. The complex exposures undertaken
by this unit demand highly technical underwriting and pricing
modeling analysis. During the year ended December 31, 2010,
our professional liability treaty business accounted for 14.9%,
or $78.0 million, of our total gross premiums written in
the reinsurance segment.
Our international treaty units portfolio protects U.K.
insurers, including Lloyds of London syndicates and
Continental European companies. While we continue to concentrate
on Euro-centric business, we are now writing and will
increasingly expand our capabilities outside of Europe. During
the year ended December 31, 2010, the international treaty
unit accounted for 20.8%, or $109.0 million, of our total
gross premiums written in the reinsurance segment.
For our specialty reinsurance business, we underwrite accident
and health business, emphasizing catastrophe personal accident
programs and workers compensation catastrophe business. During
the year ended December 31, 2010, our specialty reinsurance
business accounted for 5.5%, or $28.8 million, of our total
gross premiums written in the reinsurance segment.
Facultative casualty business principally comprises
lower-attachment, individual-risk reinsurance covering
automobile liability, general liability and workers compensation
risks for many of the largest U.S. property-casualty and
surplus lines insurers. During the year ended December 31,
2010, our facultative reinsurance business accounted for 2.7%,
or $14.4 million, of our total gross premiums written in
the reinsurance segment.
For more information on our gross premiums written by line of
business in our reinsurance segment, see Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations Results of
Operations Reinsurance Segment
Comparison of Years Ended December 31, 2010 and 2009
and Comparison of Years Ended
December 31, 2009 and 2008.
Distribution
Due to a number of factors, including transactional size and
complexity, the distribution infrastructure of the reinsurance
marketplace is characterized by relatively few intermediary
firms. As a result, we have close business relationships with a
small number of reinsurance intermediaries, and our reinsurance
segment business during 2010 was primarily with affiliates of
Marsh, Aon and Willis accounting for 38%, 32% and 11%,
respectively, of total gross premiums written in this segment
during 2010. Due to the substantial percentages of premiums
produced in our U.S. insurance, internal insurance and
reinsurance segments by the top three intermediaries, the loss
of business from any one of them could have a material adverse
effect on our business.
Security
Arrangements
Allied World Assurance Company, Ltd, our Bermuda insurance and
reinsurance company, is not admitted as an insurer nor is it
accredited as a reinsurer in any jurisdiction in the United
States. As a result, it is generally required to post collateral
security with respect to any reinsurance liabilities it assumes
from ceding insurers domiciled in the United States in order for
U.S. ceding companies to obtain credit on their
U.S. statutory financial statements with respect to
insurance liabilities ceded by them. Under applicable statutory
provisions, the security arrangements may be in the form of
letters of credit, reinsurance trusts maintained by trustees or
funds-withheld arrangements where assets are held by the ceding
company. For a description of the security arrangements used by
us, see Item 7. Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Restrictions and Specific
Requirements.
Enterprise
Risk Management
General
While the assumption of risk is inherent in our business, we
believe we have developed a strong risk management culture that
is fostered and maintained by our senior management. Our
enterprise risk management (ERM) consists of
numerous processes and controls that have been designed by our
senior management, with oversight by our Board of Directors,
including through its Enterprise Risk Committee, and implemented
by
8
employees across our organization. One key element of our ERM is
our economic capital model. Utilizing this modeling framework,
we review the relative interaction between risks impacting us
from underwriting through investment risks. Our ERM supports our
firm-wide decision making process by aiming to provide reliable
and timely risk information. Our primary ERM objectives are to:
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protect our capital position,
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ensure that our assumed risks (individually and in the
aggregate) are within our firm-wide risk appetite,
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maximize our risk-adjusted returns on capital, and
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manage our earnings volatility.
|
We have identified the following six major categories of risk
within our business:
Underwriting risk: Encompasses risks
associated with entering into insurance and reinsurance
transactions and includes frequency and severity assessments,
pricing adequacy issues and exposures posed by new products. For
more information concerning our management of underwriting risk,
see Underwriting Risk Management below.
Catastrophe and Aggregate Accumulation
risk: Addresses the organizations exposure
to natural catastrophes, such as windstorms or floods,
particularly with regard to managing the concentration of
exposed insurance limits within coastal or other areas that are
more prone to severe catastrophic events. For more information
concerning our management of catastrophe risk, see
Underwriting Risk Management below.
Reserving risk: The risks associated with
overestimating or underestimating required reserves is a
significant risk for any company that writes long-tailed
casualty business. For companies like ours with a shorter
operating history, there is less statistical experience upon
which to base reserve estimates for long-tail business and the
risks associated with over-reserving or under-reserving are
therefore commensurately higher.
Investment risk: Addresses risks of market
volatility and losses associated with individual investments and
investment classes, as well as overall portfolio risk associated
with decisions as to asset mix, geographic risk, duration and
liquidity.
Reinsurance risk: The ceding of policies we
write to other reinsurers is a principal risk management
activity, and it requires careful monitoring of the
concentration of our reinsured exposures and the
creditworthiness of the reinsurers to which we cede business.
Operational risk: Encompasses a wide range of
risks related to our operations, including: corporate
governance, claims settlement processes, regulatory compliance,
employment practices and IT exposures (including disaster
recovery and business continuity planning).
Our risk governance structure includes committees comprised of
senior underwriting, actuarial, finance, legal, investment and
operations staff that identify, monitor and help manage each of
these risks. Our management-based Risk Management Committee,
chaired by our Chief Risk Officer, focuses primarily on
identifying correlations among our primary categories of risk,
developing metrics to assess our overall risk position,
performing an annual risk assessment and reviewing continually
factors that may impact our organizational risk. This risk
governance structure is complemented by our internal audit
department, which assesses the adequacy and effectiveness of our
internal control systems and coordinates risk-based audits and
compliance reviews and other specific initiatives to evaluate
and address risk within targeted areas of our business. Our ERM
is a dynamic process, with periodic updates being made to
reflect organizational processes and the recalibration of our
models, as well as staying current with changes within our
industry and the global economic environment.
Our managements internal ERM efforts are overseen by our
Board of Directors, primarily through its Enterprise Risk
Committee. This committee, comprised of independent directors,
is charged with reviewing and recommending to the Board of
Directors our overall firm-wide risk appetite as well as
overseeing managements compliance therewith. Our
Enterprise Risk Committee reviews our risk management
methodologies, standards, tolerances and risk strategies, and
assesses whether management is addressing risk issues in a
timely and appropriate manner. This committee also works in
consultation with our Audit Committee, Investment Committee
9
and Compensation Committee to oversee financial, investment and
compensation risks, respectively. Internal controls and ERM can
provide a reasonable but not absolute assurance that our control
objectives will be met. The possibility of material financial
loss remains in spite of our ERM efforts.
Underwriting
Risk Management
Underwriting insurance and reinsurance coverage, which is our
primary business activity, entails the assumption of risk.
Therefore, protecting corporate assets from an unexpected level
of loss related to underwriting activities is a major area of
focus. We emphasize careful risk selection by evaluating a
potential insureds risk management practices, loss history
and adequacy of retention. Other factors that go into the
effective management of underwriting risk may differ depending
on the line of business involved and the type of account being
insured or reinsured.
In our direct insurance casualty products, we strive to write
diverse books of business across a variety of product lines and
industry classes, and we review business concentrations on a
regular basis with the objective of creating balanced
portfolios. By maintaining a balanced casualty portfolio, we
believe we are less vulnerable to adverse market changes in any
one product or industry. In addition, because of the large
limits we often deploy for casualty business written in the
U.S. insurance segment and the international insurance
segment, we utilize both facultative and treaty reinsurance to
reduce our net exposure. For more information on the reinsurance
we purchase for the casualty business written in the
U.S. insurance and international insurance segments, see
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Critical Accounting Policies Ceded Reinsurance.
In our direct insurance property products, we have historically
managed our property catastrophe exposure by closely monitoring
our policy limits in addition to utilizing complex risk models
that analyze the locations covered by each insurance policy
enabling us to obtain a more accurate assessment of our property
catastrophe exposure. In addition to our continued focus on
aggregate limits and modeled probable maximum loss, we have
implemented a gross exposed policy limits approach that focuses
on exposures in catastrophe-prone geographic zones and takes
into consideration flood severity, demand surge and business
interruption exposures for each critical area. We closely
monitor our gross accumulations in each zone and restrict our
gross exposed policy limits in each critical property
catastrophe zone to an amount consistent with our probable
maximum loss. Subsequent to a catastrophic event, we reassess
our risk appetite and risk tolerances to ensure they are aligned
with our capital preservation targets. Additionally, for our
direct property, workers compensation, accident and health
catastrophe and property reinsurance business, we seek to manage
our risk exposure so that our probable maximum losses for a
single catastrophe event, after all applicable reinsurance, in
any one-in-250-year event does not exceed
approximately 20% of our total capital.
Before we review the specifics of any proposal in our
reinsurance segment, we consider the attributes of the client,
including the experience and reputation of its management and
its risk management strategy. We also examine the level of
shareholders equity, industry ratings, length of
incorporation, duration of business model, portfolio
profitability, types of exposures and the extent of its
liabilities. To identify, manage and monitor accumulations of
exposures from potential property catastrophes, we employ
industry-recognized software. Our underwriters, actuaries and
claims personnel collaborate throughout the reinsurance
underwriting process. For property proposals, we also obtain
information on the nature of the perils to be included and the
policy information on all locations to be covered under the
reinsurance contract. If a program meets our underwriting
criteria, we then assess the adequacy of its proposed pricing,
terms and conditions, and its potential impact on our profit
targets and risk objectives.
Competition
The insurance and reinsurance industry is highly competitive.
Insurance and reinsurance companies compete on the basis of many
factors, including premium rates, general reputation and
perceived financial strength, the terms and conditions of the
products offered, ratings assigned by independent rating
agencies, speed of claims payments and reputation and experience
in risks underwritten.
10
We compete with major U.S. and
non-U.S. insurers
and reinsurers, many of which have greater financial, marketing
and management resources than we do. Some of these companies
have more capital than our company. In our direct insurance
business, we compete with insurers that provide property and
casualty-based lines of insurance such as: ACE Limited, Arch
Capital Group Ltd., Axis Capital Holdings Limited, Chartis Inc.
(a wholly-owned subsidiary of American International Group, Inc.
(AIG)), The Chubb Corporation (Chubb),
Endurance Specialty Holdings Ltd., Factory Mutual Insurance
Company, HCC Insurance Holdings, Inc., Ironshore Inc., Liberty
Mutual Insurance Company, Lloyds, Markel Insurance
Company, Munich Re Group, The Navigators Group, Inc., OneBeacon
Insurance Group, Ltd, Swiss Reinsurance Company, W.R. Berkeley
Corporation, XL Capital Ltd and Zurich Financial Services. In
our reinsurance business, we compete with reinsurers that
provide property and casualty-based lines of reinsurance such
as: ACE Limited, Alterra Capital Holdings, Ltd, Arch Capital
Group Ltd., Berkshire Hathaway, Inc., Everest Re Group, Ltd.,
Lloyds of London, Montpelier Re Holdings Ltd., Munich Re
Group, PartnerRe Ltd., Platinum Underwriters Holdings, Ltd.,
RenaissanceRe Holdings Ltd., Swiss Reinsurance Company,
Transatlantic Holdings, Inc. and XL Capital Ltd.
In addition, risk-linked securities and derivative and other
non-traditional risk transfer mechanisms and vehicles are being
developed and offered by other parties, including entities other
than insurance and reinsurance companies. The availability of
these non-traditional products could reduce the demand for
traditional insurance and reinsurance.
Our
Financial Strength Ratings
Ratings are an important factor in establishing the competitive
position of insurance and reinsurance companies. A.M. Best,
Moodys and Standard & Poors have each
developed a rating system to provide an opinion of an
insurers or reinsurers financial strength and
ability to meet ongoing obligations to its policyholders. Each
rating reflects the rating agencys opinion of the
capitalization, management and sponsorship of the entity to
which it relates, and is neither an evaluation directed to
investors in our common shares nor a recommendation to buy, sell
or hold our common shares. A.M. Best ratings currently
range from A+ (Superior) to F (In
Liquidation) and include 16 separate ratings categories.
Moodys maintains a letter scale rating from
Aaa (Exceptional) to NP (Not Prime) and
includes 21 separate ratings categories. Standard &
Poors maintains a letter scale rating system ranging from
AAA (Extremely Strong) to R (under
regulatory supervision) and includes 21 separate ratings
categories. Our principal operating subsidiaries and their
respective ratings from A.M. Best, Moodys and
Standard & Poors are provided in the table below.
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Rated A
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Rated A2
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Rated A-
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(Excellent) from
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(Good) from
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(Strong) from
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Subsidiary
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A.M. Best(1)
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Moodys(2)
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Standard & Poors(3)
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Allied World Assurance Company, Ltd
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X
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X
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X
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Allied World Assurance Company (U.S.) Inc.
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X
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X
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X
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Allied World National Assurance Company
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X
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X
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X
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Allied World Reinsurance Company
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X
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X
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X
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Darwin National Assurance Company
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X
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Darwin Select Insurance Company
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X
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Allied World Assurance Company (Europe) Limited
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X
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X
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Allied World Assurance Company (Reinsurance) Limited
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X
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X
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(1) |
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Third highest of 16 available ratings from A.M. Best. |
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(2) |
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Sixth highest of 21 available ratings from Moodys. |
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(3) |
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Seventh highest of 21 available ratings from
Standard & Poors. |
In 2010, we established Syndicate 2232 and commenced
underwriting activities through the Lloyds market. All
Lloyds syndicates benefit from Lloyds central
resources, including Lloyds brand, its network of global
licenses and the central fund. As all of Lloyds policies
are ultimately backed by this common security, a single
11
market rating can be applied. A.M. Best has assigned
Lloyds a financial strength rating of A
(Excellent) and Standard & Poors and Fitch
Ratings have assigned Lloyds a financial strength rating
of A+ (Strong).
In addition, our $500 million aggregate principal amount of
7.50% senior notes due 2016 and $300 million aggregate
principal amount of 5.50% senior notes due 2020 have each
been assigned the following ratings: a senior unsecured debt
rating of bbb by A.M. Best (fourth of eight A.M. Best
debt rating categories); a rating of BBB by Standard &
Poors (fourth of 10 debt rating categories); and rating of
Baa1 (fourth of nine debt rating categories) by Moodys.
These ratings are subject to periodic review, and may be revised
upward, downward or revoked, at the sole discretion of the
rating agencies.
Reserve
for Losses and Loss Expenses
We are required by applicable insurance laws and regulations in
the countries in which we operate and accounting principles
generally accepted in the United States
(U.S. GAAP) to establish loss reserves to cover
our estimated liability for the payment of all losses and loss
expenses incurred with respect to premiums earned on the
policies and treaties that we write. These reserves are balance
sheet liabilities representing estimates of losses and loss
expenses we are required to pay for insured or reinsured claims
that have occurred as of or before the balance sheet date. It is
our policy to establish these losses and loss expense reserves
using prudent actuarial methods after reviewing all information
known to us as of the date they are recorded. For more specific
information concerning the statistical and actuarial methods we
use to estimate ultimate expected losses and loss expenses, see
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Critical Accounting Policies Reserve for Losses and
Loss Expenses.
The following tables show the development of gross and net
reserves for losses and loss expenses, respectively. The tables
do not present accident or policy year development data. Each
table begins by showing the original year-end reserves recorded
at the balance sheet date for each of the years presented
(as originally estimated). This represents the
estimated amounts of losses and loss expenses arising in all
prior years that are unpaid at the balance sheet date, including
reserves for losses incurred but not reported
(IBNR). The re-estimated liabilities reflect
additional information regarding claims incurred prior to the
end of the preceding financial year. A (redundancy) or
deficiency arises when the re-estimation of reserves recorded at
the end of each prior year is (less than) or greater than its
estimation at the preceding year-end. The cumulative
(redundancies) or deficiencies represent cumulative differences
between the original reserves and the currently re-estimated
liabilities over all prior years. Annual changes in the
estimates are reflected in the consolidated statement of
operations and comprehensive income for each year, as the
liabilities are re-estimated.
12
The lower sections of the tables show the portions of the
original reserves that were paid (claims paid) as of the end of
subsequent years. This section of each table provides an
indication of the portion of the re-estimated liability that is
settled and is unlikely to develop in the future. For our quota
share treaty reinsurance business, we have estimated the
allocation of claims paid to applicable years based on a review
of large losses and earned premium percentages.
Development
of Reserve for Losses and Loss Expenses Cumulative Deficiency
(Redundancy)
Gross Losses
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Year Ended December 31,
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2001
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2002
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2003
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2004
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2005
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2006
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2007
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2008(1)
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2009
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2010
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($ in thousands)
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As Originally Estimated:
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$
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213
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$
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310,508
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$
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1,062,138
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$
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2,084,331
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$
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3,543,811
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$
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3,900,546
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$
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4,307,637
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$
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4,576,828
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$
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4,761,772
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$
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4,879,188
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Liability Re-estimated as of:
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One Year Later
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213
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253,691
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981,713
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1,961,172
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3,403,274
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3,622,721
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3,484,894
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4,290,335
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4,329,254
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Two Years Later
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213
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226,943
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899,176
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1,873,599
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3,249,263
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3,247,858
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3,149,303
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3,877,832
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Three Years Later
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213
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217,712
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845,162
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1,733,707
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2,894,460
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2,911,300
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2,791,110
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Four Years Later
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213
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199,860
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810,183
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1,513,697
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2,558,600
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2,605,761
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Five Years Later
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213
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205,432
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704,666
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1,306,220
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2,315,913
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Six Years Later
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213
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|
196,495
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626,818
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1,235,604
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Seven Years Later
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213
|
|
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|
179,752
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619,903
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Eight Years Later
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213
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|
184,107
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Nine Years Later
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213
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Cumulative (Redundancy)
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(126,401
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)
|
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(442,235
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)
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(848,727
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)
|
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(1,227,898
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)
|
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|
(1,294,785
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)
|
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|
(1,516,527
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)
|
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(698,996
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)
|
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|
(432,518
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)
|
|
|
|
|
Cumulative Claims Paid as of:
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One Year Later
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54,288
|
|
|
|
138,843
|
|
|
|
374,605
|
|
|
|
718,263
|
|
|
|
560,163
|
|
|
|
583,447
|
|
|
|
574,823
|
|
|
|
634,463
|
|
|
|
|
|
Two Years Later
|
|
|
|
|
|
|
83,465
|
|
|
|
237,949
|
|
|
|
574,399
|
|
|
|
1,154,901
|
|
|
|
1,002,503
|
|
|
|
943,879
|
|
|
|
1,089,540
|
|
|
|
|
|
|
|
|
|
Three Years Later
|
|
|
|
|
|
|
100,978
|
|
|
|
301,264
|
|
|
|
725,955
|
|
|
|
1,521,586
|
|
|
|
1,252,921
|
|
|
|
1,311,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
18
|
|
|
|
124,109
|
|
|
|
372,187
|
|
|
|
842,931
|
|
|
|
1,662,811
|
|
|
|
1,531,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
18
|
|
|
|
163,516
|
|
|
|
425,394
|
|
|
|
910,393
|
|
|
|
1,828,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
18
|
|
|
|
184,691
|
|
|
|
456,652
|
|
|
|
971,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
18
|
|
|
|
195,688
|
|
|
|
478,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
18
|
|
|
|
201,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reserve for losses and loss expenses includes the reserves for
losses and loss expenses of Finial Insurance Company (renamed
Allied World Reinsurance Company), which we acquired in February
2008, and Darwin, which we acquired in October 2008. |
13
Development
of Reserve for Losses and Loss Expenses
Cumulative Deficiency (Redundancy)
Gross
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Liability Re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year Later
|
|
|
100
|
%
|
|
|
82
|
%
|
|
|
92
|
%
|
|
|
94
|
%
|
|
|
96
|
%
|
|
|
93
|
%
|
|
|
81
|
%
|
|
|
94
|
%
|
|
|
91
|
%
|
Two Years Later
|
|
|
100
|
%
|
|
|
73
|
%
|
|
|
85
|
%
|
|
|
90
|
%
|
|
|
92
|
%
|
|
|
83
|
%
|
|
|
73
|
%
|
|
|
85
|
%
|
|
|
|
|
Three Years Later
|
|
|
100
|
%
|
|
|
70
|
%
|
|
|
80
|
%
|
|
|
83
|
%
|
|
|
82
|
%
|
|
|
75
|
%
|
|
|
65
|
%
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
100
|
%
|
|
|
64
|
%
|
|
|
76
|
%
|
|
|
73
|
%
|
|
|
72
|
%
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
100
|
%
|
|
|
66
|
%
|
|
|
66
|
%
|
|
|
63
|
%
|
|
|
65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
100
|
%
|
|
|
63
|
%
|
|
|
59
|
%
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
100
|
%
|
|
|
58
|
%
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
100
|
%
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative (Redundancy)
|
|
|
|
|
|
|
(41
|
)%
|
|
|
(42
|
)%
|
|
|
(41
|
)%
|
|
|
(35
|
)%
|
|
|
(33
|
)%
|
|
|
(35
|
)%
|
|
|
(15
|
)%
|
|
|
(9
|
)%
|
Gross Loss and Loss Expense Cumulative Paid as a Percentage
of Originally Estimated Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Claims Paid as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year Later
|
|
|
0
|
%
|
|
|
17
|
%
|
|
|
13
|
%
|
|
|
18
|
%
|
|
|
20
|
%
|
|
|
14
|
%
|
|
|
14
|
%
|
|
|
13
|
%
|
|
|
13
|
%
|
Two Years Later
|
|
|
0
|
%
|
|
|
27
|
%
|
|
|
22
|
%
|
|
|
28
|
%
|
|
|
33
|
%
|
|
|
26
|
%
|
|
|
22
|
%
|
|
|
24
|
%
|
|
|
|
|
Three Years Later
|
|
|
0
|
%
|
|
|
33
|
%
|
|
|
28
|
%
|
|
|
35
|
%
|
|
|
43
|
%
|
|
|
32
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
8
|
%
|
|
|
40
|
%
|
|
|
35
|
%
|
|
|
40
|
%
|
|
|
47
|
%
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
8
|
%
|
|
|
53
|
%
|
|
|
40
|
%
|
|
|
44
|
%
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
8
|
%
|
|
|
59
|
%
|
|
|
43
|
%
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
8
|
%
|
|
|
63
|
%
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
8
|
%
|
|
|
65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Losses
Net of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008(1)
|
|
|
2009
|
|
|
2010
|
|
|
As Originally Estimated:
|
|
$
|
213
|
|
|
$
|
299,946
|
|
|
$
|
967,305
|
|
|
$
|
1,809,588
|
|
|
$
|
2,826,930
|
|
|
$
|
3,211,441
|
|
|
$
|
3,624,872
|
|
|
$
|
3,688,514
|
|
|
$
|
3,841,781
|
|
|
$
|
3,951,600
|
|
Liability Re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year Later
|
|
|
213
|
|
|
|
243,129
|
|
|
|
887,870
|
|
|
|
1,760,469
|
|
|
|
2,662,723
|
|
|
|
2,978,320
|
|
|
|
3,312,248
|
|
|
|
3,440,522
|
|
|
|
3,528,426
|
|
|
|
|
|
Two Years Later
|
|
|
213
|
|
|
|
216,381
|
|
|
|
833,496
|
|
|
|
1,655,675
|
|
|
|
2,551,946
|
|
|
|
2,699,585
|
|
|
|
3,032,063
|
|
|
|
3,128,342
|
|
|
|
|
|
|
|
|
|
Three Years Later
|
|
|
213
|
|
|
|
207,945
|
|
|
|
773,967
|
|
|
|
1,551,115
|
|
|
|
2,281,007
|
|
|
|
2,416,966
|
|
|
|
2,742,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
213
|
|
|
|
191,471
|
|
|
|
746,355
|
|
|
|
1,353,988
|
|
|
|
1,986,782
|
|
|
|
2,152,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
213
|
|
|
|
197,656
|
|
|
|
648,469
|
|
|
|
1,162,263
|
|
|
|
1,776,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
213
|
|
|
|
188,733
|
|
|
|
574,803
|
|
|
|
1,098,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
213
|
|
|
|
172,219
|
|
|
|
568,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
213
|
|
|
|
176,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative (Redundancy)
|
|
|
|
|
|
|
(123,364
|
)
|
|
|
(399,032
|
)
|
|
|
(710,886
|
)
|
|
|
(1,050,447
|
)
|
|
|
(1,059,220
|
)
|
|
|
(882,388
|
)
|
|
|
(560,172
|
)
|
|
|
(313,355
|
)
|
|
|
|
|
Cumulative Claims Paid as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year Later
|
|
|
|
|
|
|
52,077
|
|
|
|
133,336
|
|
|
|
306,865
|
|
|
|
461,310
|
|
|
|
377,250
|
|
|
|
415,214
|
|
|
|
415,902
|
|
|
|
498,084
|
|
|
|
|
|
Two Years Later
|
|
|
|
|
|
|
76,843
|
|
|
|
214,939
|
|
|
|
482,038
|
|
|
|
759,276
|
|
|
|
698,959
|
|
|
|
681,332
|
|
|
|
811,697
|
|
|
|
|
|
|
|
|
|
Three Years Later
|
|
|
|
|
|
|
93,037
|
|
|
|
272,028
|
|
|
|
624,894
|
|
|
|
990,514
|
|
|
|
884,077
|
|
|
|
964,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
18
|
|
|
|
116,494
|
|
|
|
342,898
|
|
|
|
733,286
|
|
|
|
1,090,679
|
|
|
|
1,094,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
18
|
|
|
|
155,904
|
|
|
|
407,712
|
|
|
|
783,091
|
|
|
|
1,219,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
18
|
|
|
|
172,974
|
|
|
|
426,354
|
|
|
|
833,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
18
|
|
|
|
176,390
|
|
|
|
440,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
18
|
|
|
|
177,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reserve for losses and loss expenses net includes the reserves
for losses and loss expenses of Finial Insurance Company
(renamed Allied World Reinsurance Company), which we acquired in
February 2008, and Darwin, which we acquired in October 2008. |
15
Losses
Net of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Liability Re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year Later
|
|
|
100
|
%
|
|
|
81
|
%
|
|
|
92
|
%
|
|
|
97
|
%
|
|
|
94
|
%
|
|
|
93
|
%
|
|
|
91
|
%
|
|
|
93
|
%
|
|
|
92
|
%
|
Two Years Later
|
|
|
100
|
%
|
|
|
72
|
%
|
|
|
86
|
%
|
|
|
91
|
%
|
|
|
90
|
%
|
|
|
84
|
%
|
|
|
84
|
%
|
|
|
85
|
%
|
|
|
|
|
Three Years Later
|
|
|
100
|
%
|
|
|
69
|
%
|
|
|
80
|
%
|
|
|
86
|
%
|
|
|
81
|
%
|
|
|
75
|
%
|
|
|
76
|
%
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
100
|
%
|
|
|
64
|
%
|
|
|
77
|
%
|
|
|
75
|
%
|
|
|
70
|
%
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
100
|
%
|
|
|
66
|
%
|
|
|
67
|
%
|
|
|
64
|
%
|
|
|
63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
100
|
%
|
|
|
63
|
%
|
|
|
59
|
%
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
100
|
%
|
|
|
57
|
%
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
100
|
%
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative (Redundancy)
|
|
|
|
|
|
|
(41
|
)%
|
|
|
(41
|
)%
|
|
|
(39
|
)%
|
|
|
(37
|
)%
|
|
|
(33
|
)%
|
|
|
(24
|
)%
|
|
|
(15
|
)%
|
|
|
(8
|
)%
|
Net Loss and Loss Expense Cumulative Paid as a Percentage of
Originally Estimated Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Claims Paid as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year Later
|
|
|
0
|
%
|
|
|
17
|
%
|
|
|
14
|
%
|
|
|
17
|
%
|
|
|
16
|
%
|
|
|
12
|
%
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
13
|
%
|
Two Years Later
|
|
|
0
|
%
|
|
|
26
|
%
|
|
|
22
|
%
|
|
|
27
|
%
|
|
|
27
|
%
|
|
|
22
|
%
|
|
|
19
|
%
|
|
|
22
|
%
|
|
|
|
|
Three Years Later
|
|
|
0
|
%
|
|
|
31
|
%
|
|
|
28
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
28
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
8
|
%
|
|
|
39
|
%
|
|
|
35
|
%
|
|
|
41
|
%
|
|
|
39
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
8
|
%
|
|
|
52
|
%
|
|
|
42
|
%
|
|
|
43
|
%
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
8
|
%
|
|
|
58
|
%
|
|
|
44
|
%
|
|
|
46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
8
|
%
|
|
|
59
|
%
|
|
|
46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
8
|
%
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
The table below is a reconciliation of the beginning and ending
liability for unpaid losses and loss expenses for the years
ended December 31, 2010, 2009 and 2008. Losses incurred and
paid are reflected net of reinsurance recoveries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands)
|
|
|
Gross liability at beginning of year
|
|
$
|
4,761,772
|
|
|
$
|
4,576,828
|
|
|
$
|
3,919,772
|
|
Reinsurance recoverable at beginning of year
|
|
|
(919,991
|
)
|
|
|
(888,314
|
)
|
|
|
(682,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability at beginning of year
|
|
|
3,841,781
|
|
|
|
3,688,514
|
|
|
|
3,237,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of net reserve for losses and loss expenses
|
|
|
|
|
|
|
|
|
|
|
298,927
|
|
Net losses incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commutation of variable-rated reinsurance contracts
|
|
|
8,864
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
1,012,374
|
|
|
|
852,052
|
|
|
|
921,217
|
|
Prior years
|
|
|
(313,355
|
)
|
|
|
(247,992
|
)
|
|
|
(280,095
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
707,883
|
|
|
|
604,060
|
|
|
|
641,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paid losses related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
98,646
|
|
|
|
42,320
|
|
|
|
79,037
|
|
Prior years
|
|
|
498,084
|
|
|
|
415,901
|
|
|
|
395,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
596,730
|
|
|
|
458,221
|
|
|
|
474,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange revaluation
|
|
|
(1,334
|
)
|
|
|
7,428
|
|
|
|
(14,342
|
)
|
Net liability at end of year
|
|
|
3,951,600
|
|
|
|
3,841,781
|
|
|
|
3,688,514
|
|
Reinsurance recoverable at end of year
|
|
|
927,588
|
|
|
|
919,991
|
|
|
|
888,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability at end of year
|
|
$
|
4,879,188
|
|
|
$
|
4,761,772
|
|
|
$
|
4,576,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
Investment
Strategy and Guidelines
We believe that we follow a conservative investment strategy
designed to emphasize the preservation of our invested assets
and provide adequate liquidity for the prompt payment of claims.
To help ensure adequate liquidity for payment of claims, we take
into account the maturity and duration of our investment
portfolio and our general liability profile. In making
investment decisions, we consider the impact of various
catastrophic events to which we may be exposed. Our portfolio
therefore consists primarily of investment grade, fixed-maturity
securities of
short-to-medium
term duration. As of December 31, 2010, these securities,
along with cash and cash equivalents, represented 91% of our
total investments and cash and cash equivalents, with the
remainder invested in non-investment grade securities, equities,
hedge funds and other alternative investments. Our current
Investment Policy Statement contains the amount of our
investment portfolio that may be invested in alternative
investments, including public and private equities, preferred
equities, non-investment grade investments and hedge funds.
In an effort to meet business needs and mitigate risks, our
investment guidelines provide restrictions on our
portfolios composition, including limits on the type of
issuer, sector limits, credit quality limits, portfolio
duration, limits on the amount of investments in approved
countries and permissible security types. We may direct our
investment managers to invest some of the investment portfolio
in currencies other than the U.S. dollar based on the
business we have written, the currency in which our loss
reserves are denominated on our books or regulatory requirements.
Our investment performance is subject to a variety of risks,
including risks related to general economic conditions, market
volatility, interest rate fluctuations, liquidity risk and
credit and default risk. Investment guideline restrictions have
been established in an effort to minimize the effect of these
risks but may not always be effective due to factors beyond our
control. Interest rates are highly sensitive to many factors,
including
17
governmental monetary policies, domestic and international
economic and political conditions and other factors beyond our
control. A significant increase in interest rates could result
in significant losses, realized or unrealized, in the value of
our investment portfolio. Additionally, with respect to some of
our investments, we are subject to prepayment and therefore
reinvestment risk. Alternative investments, such as our hedge
fund investments, subject us to restrictions on sale, transfer
and redemption, which may limit our ability to withdraw funds or
realize on such investments for some period of time after our
initial investment. The values of, and returns on, such
investments may also be more volatile.
Investment
Committee and Investment Managers
The Investment Committee of our Board of Directors has approved
an investment policy statement that contains investment
guidelines and supervises our investment activity. The
Investment Committee regularly monitors our overall investment
results, compliance with investment objectives and guidelines,
and ultimately reports our overall investment results to the
Board of Directors.
For our fixed income assets we have engaged four outside
investment managers to provide us with certain discretionary
investment management services. We have agreed to pay investment
management fees based on the market values of the investments in
the portfolio. The fees, which vary depending on the amount of
assets under management, are included as a deduction to net
investment income. These investment management agreements may
generally be terminated by either party upon 30 days prior
written notice.
Our
Portfolio
Composition
as of December 31, 2010
As of December 31, 2010, our aggregate invested assets
totaled approximately $8.0 billion. Total investments and
cash and cash equivalents include cash and cash equivalents,
restricted cash, fixed-maturity securities and hedge fund
investments. The average credit quality of our investments is
rated AA by Standard & Poors and Aa2 by
Moodys. Short-term instruments must be rated a minimum of
A-1, F-1 or
P-1 by
Standard & Poors, Moodys or Fitch. The
target duration range was 1.75 to 4.25 years. The portfolio
has a total return rather than income orientation. As of
December 31, 2010, the average duration of our investment
portfolio was 2.7 years and there were approximately
$57.1 million of net unrealized gains in the portfolio, net
of applicable tax.
18
The following table shows the types of securities in our
portfolio, their fair market values, average rating and
portfolio percentage as of December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
Average
|
|
|
Portfolio
|
|
|
|
Fair Value
|
|
|
Rating
|
|
|
Percentage
|
|
|
|
($ in thousands)
|
|
|
Type of Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
853,368
|
|
|
|
AAA
|
|
|
|
10.6
|
%
|
U.S. government securities
|
|
|
1,154,201
|
|
|
|
AAA
|
|
|
|
14.4
|
%
|
U.S. government agencies
|
|
|
167,472
|
|
|
|
AAA
|
|
|
|
2.1
|
%
|
Non-U.S.
government securities
|
|
|
266,177
|
|
|
|
AAA
|
|
|
|
3.3
|
%
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
|
1,195,905
|
|
|
|
AAA
|
|
|
|
14.9
|
%
|
Non-agency residential mortgage-backed securities
|
|
|
164,913
|
|
|
|
AA-
|
|
|
|
2.0
|
%
|
Non-agency residential mortgage-backed securities-non-investment
grade strategy
|
|
|
207,022
|
|
|
|
B-
|
|
|
|
2.6
|
%
|
Commercial mortgage-backed securities
|
|
|
184,043
|
|
|
|
AAA
|
|
|
|
2.3
|
%
|
Total mortgage-backed securities
|
|
|
1,751,883
|
|
|
|
|
|
|
|
21.8
|
%
|
Corporate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Institutions
|
|
|
1,334,617
|
|
|
|
AA-
|
|
|
|
16.6
|
%
|
Industrials
|
|
|
958,734
|
|
|
|
A-
|
|
|
|
11.9
|
%
|
Utilities
|
|
|
233,199
|
|
|
|
BBB+
|
|
|
|
2.9
|
%
|
Total corporate securities
|
|
|
2,526,550
|
|
|
|
|
|
|
|
31.4
|
%
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card receivables
|
|
|
28,905
|
|
|
|
AAA
|
|
|
|
0.4
|
%
|
Automobile loan receivables
|
|
|
84,105
|
|
|
|
AAA
|
|
|
|
1.0
|
%
|
Student loan receivables
|
|
|
177,860
|
|
|
|
AAA
|
|
|
|
2.2
|
%
|
Collateralized loan obligations
|
|
|
186,204
|
|
|
|
AA
|
|
|
|
2.3
|
%
|
Other
|
|
|
71,975
|
|
|
|
AAA
|
|
|
|
0.9
|
%
|
Total asset-backed securities
|
|
|
549,049
|
|
|
|
|
|
|
|
6.8
|
%
|
State, municipalities and political subdivisions
|
|
|
245,614
|
|
|
|
AA
|
|
|
|
3.1
|
%
|
Hedge funds
|
|
|
347,632
|
|
|
|
N/A
|
|
|
|
4.3
|
%
|
Equity securities
|
|
|
174,976
|
|
|
|
N/A
|
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio
|
|
$
|
8,036,922
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For more information on the securities in our investment
portfolio, please see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies
Fair Value of Financial Instruments.
19
Ratings
as of December 31, 2010
The investment ratings (provided by Standard &
Poors and Moodys) for fixed maturity securities held
as of December 31, 2010 and the percentage of our total
fixed maturity securities they represented on that date were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
of Total
|
|
|
|
Fair
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
|
($ in millions)
|
|
|
|
|
|
Ratings
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
1,321.7
|
|
|
|
19.9
|
%
|
AAA/Aaa
|
|
|
2,677.4
|
|
|
|
40.2
|
%
|
AA/Aa
|
|
|
622.4
|
|
|
|
9.3
|
%
|
A/A
|
|
|
1,259.3
|
|
|
|
18.9
|
%
|
BBB/Baa
|
|
|
523.6
|
|
|
|
7.9
|
%
|
BB
|
|
|
28.1
|
|
|
|
0.4
|
%
|
B/B
|
|
|
52.8
|
|
|
|
0.8
|
%
|
CCC+ and below
|
|
|
175.6
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,660.9
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Maturity
Distribution as of December 31, 2010
The maturity distribution for our fixed maturity securities held
as of December 31, 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
of Total
|
|
|
|
Fair
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
|
($ in millions)
|
|
|
|
|
|
Maturity
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
249.3
|
|
|
|
3.8
|
%
|
Due after one year through five years
|
|
|
3,119.9
|
|
|
|
46.8
|
%
|
Due after five years through ten years
|
|
|
867.9
|
|
|
|
13.0
|
%
|
Due after ten years
|
|
|
122.9
|
|
|
|
1.9
|
%
|
Mortgage-backed
|
|
|
1,751.9
|
|
|
|
26.3
|
%
|
Asset backed
|
|
|
549.0
|
|
|
|
8.2
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,660.9
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Investment
Returns for the Year Ended December 31, 2010
Our investment returns for year ended December 31, 2010:
|
|
|
|
|
Net investment income
|
|
|
244.1
|
|
Net realized investment gains
|
|
|
285.6
|
|
Net change in unrealized gains
|
|
|
(61.0
|
)
|
Net impairment charges recognized in earnings
|
|
|
(0.2
|
)
|
|
|
|
|
|
Total net investment return
|
|
|
468.5
|
|
|
|
|
|
|
Total financial statement portfolio return(1)
|
|
|
6.1
|
%
|
Effective annualized yield(2)
|
|
|
3.3
|
%
|
20
|
|
|
(1) |
|
Total financial statement portfolio return for our investment
portfolio is calculated using beginning and ending market values
adjusted for external cash flows and includes the net change in
unrealized gains and losses. |
|
(2) |
|
Effective annualized yield is calculated by dividing net
investment income by the average balance of aggregate invested
assets, on an amortized cost basis. |
Our
Principal Operating Subsidiaries
Allied World Assurance Company, Ltd is a registered Class 4
Bermuda insurance and reinsurance company that began operations
in November 2001 and carries on business from its offices in
Bermuda and from branch offices licensed in Hong Kong and
Singapore. Allied World Assurance Company (Europe) Limited was
incorporated as a wholly-owned subsidiary of Allied World
Assurance Holdings (Ireland) Ltd and has been approved to carry
on business in the EU from its office in Ireland since October
2002 and from a branch office in London since May 2003. Since
its formation, Allied World Assurance Company (Europe) Limited
has written business primarily originating from Ireland, the
United Kingdom and Continental Europe. Allied World Assurance
Company (Reinsurance) Limited was incorporated as a wholly-owned
subsidiary of Allied World Assurance Holdings (Ireland) Ltd and
has been approved to carry on business in the EU from its office
in Ireland since July 2003, from a branch office in London since
August 2004 and from a branch office in Zug, Switzerland since
October 2008. We include the business produced by this entity in
our international insurance segment even though the majority of
coverages are structured as facultative reinsurance.
We write insurance in the United States primarily through four
subsidiaries, Allied World Assurance Company (U.S.) Inc. and
Allied World National Assurance Company, which we acquired in
July 2002, and Darwin National Assurance Company and Darwin
Select Insurance Company, which we acquired in October 2008.
These companies are authorized or eligible to write insurance on
both a surplus lines and admitted basis throughout the United
States. In February 2008, we also acquired Allied World
Reinsurance Company, through which we write our
U.S. reinsurance business.
The activities of Newmarket Administrative Services (Bermuda),
Ltd, Newmarket Administrative Services (Ireland) Limited and
Newmarket Administrative Services, Inc. are limited to providing
certain administrative services to various subsidiaries of
Holdings. During 2010, we formed a new subsidiary, 2232 Services
Limited, in the United Kingdom in order to administratively
support the operations of Syndicate 2232 at Lloyds.
Our
Employees
As of February 21, 2011, we had a total of
674 full-time employees, of which 145 worked in Bermuda,
440 in the United States, 71 in Europe, and 18 in Hong Kong and
Singapore. We believe that our employee relations are good. No
employees are subject to collective bargaining agreements.
Regulatory
Matters
General
The business of insurance and reinsurance is regulated in most
countries, although the degree and type of regulation varies
significantly from one jurisdiction to another. Our insurance
and reinsurance subsidiaries are required to comply with a wide
variety of laws and regulations applicable to insurance and
reinsurance companies, both in the jurisdictions in which they
are organized and where they sell their insurance and
reinsurance products. The insurance regulatory environment has
become subject to increased scrutiny in many jurisdictions
globally. We require our employees to take and attend ethical
behavior training on various regulatory and other matters on at
least an annual basis.
Switzerland
The companys subsidiary, Allied World Assurance Company
(Reinsurance) Limited, operates a branch office in Zug,
Switzerland. As this subsidiary is domiciled outside of
Switzerland and is regulated by the Central Bank of
21
Ireland (CBI) as a reinsurance undertaking, it is
not required to be licensed by the Swiss Financial Market
Supervisory Authority (FINMA).
Bermuda
The Insurance Act 1978 of Bermuda and related regulations, as
amended (the Insurance Act), regulates the insurance
and reinsurance business of Allied World Assurance Company, Ltd.
The Insurance Act provides that no person may carry on any
insurance business in or from within Bermuda unless registered
as an insurer by the Bermuda Monetary Authority (the
BMA). Allied World Assurance Company, Ltd has been
registered as a Class 4 insurer by the BMA and approved to
carry on general insurance and reinsurance business. Allied
World Assurance Company Holdings, Ltd and Allied World Assurance
Holdings (Ireland) Ltd are holding companies and Newmarket
Administrative Services (Bermuda), Ltd is a services company
that do not carry on any insurance or reinsurance business, and
as such each is not subject to Bermuda insurance regulations;
however, like all Bermuda companies, they are subject to the
provisions and regulations of the Companies Act 1981 of Bermuda,
as amended (the Companies Act). The Insurance Act
imposes solvency and liquidity standards and auditing and
reporting requirements on Bermuda insurance and reinsurance
companies and grants the BMA powers to supervise, investigate,
require information and the production of documents and
intervene in the affairs of these companies.
The following are some significant aspects of the Bermuda
insurance and reinsurance regulatory framework:
Solvency and Capital Standards. As a
Class 4 insurer, Allied World Assurance Company, Ltd is
required to maintain minimum solvency standards and to hold
available statutory capital and surplus equal to or exceeding
the enhanced capital requirements as determined by the BMA under
the Bermuda Solvency Capital Requirement model (BSCR
model). The BSCR model is a risk-based capital model that
provides a method for determining an insurers capital
requirements (statutory capital and surplus) taking into account
the risk characteristics of different aspects of the
companys business. The minimum solvency margin Allied
World Assurance Company, Ltd is required to maintain is equal to
the greatest of (1) $100,000,000, (2) 50% of net
premiums written (being gross premiums written less any premiums
ceded, but the company may not deduct more than 25% of gross
premiums written when computing net premiums written) and
(3) 15% of net losses and loss expense reserves.
Liquidity. Allied World Assurance Company, Ltd
must maintain a minimum liquidity ratio at least equal to the
value of its relevant assets at not less than 75% of the amount
of its relevant liabilities.
Dividends. Allied World Assurance Company, Ltd
is prohibited from declaring or paying any dividends during any
financial year it is, or would be after such dividend, in breach
of its minimum solvency margin, minimum liquidity ratio or
enhanced capital requirements. Allied World Assurance Company,
Ltd is also prohibited, without prior BMA approval, from
declaring or paying in any financial year dividends of more than
25% of its total statutory capital and surplus or from reducing
by 15% or more its total statutory capital. Under the Companies
Act, Allied World Assurance Company Holdings, Ltd and each of
its Bermuda subsidiaries may not declare or pay a dividend if
such company has reasonable grounds for believing that it is, or
would after the payment be, unable to pay its liabilities as
they become due, or that the realizable value of its assets
would thereby be less than the aggregate of its liabilities and
its issued share capital and share premium accounts.
Principal office and representatives. Allied
World Assurance Company, Ltd must maintain a principal office
and appoint a principal representative, loss reserve specialist
and independent auditor approved by the BMA.
Annual filings. Allied World Assurance
Company, Ltd must file annually with the BMA financial
statements prepared in accordance with U.S. GAAP, statutory
financial statements and a statutory financial return.
Currency matters. As the BMA has classified
each of our Bermuda subsidiaries as non-residents of Bermuda,
these subsidiaries may engage in transactions in currencies
other than Bermuda dollars and there are no restrictions on our
ability to transfer funds (other than funds denominated in
Bermuda dollars) in and out of Bermuda or to pay dividends to
U.S. residents who are holders of our common shares.
22
Code of Conduct. Allied World Assurance
Company, Ltd must comply with the Insurance Code of Conduct
which prescribes the duties, standards, procedures and sound
business principles with which all companies registered under
the Insurance Act must comply. Failure to comply with the
requirements of the Code will be taken into account by the BMA
in determining whether an insurer is conducting its business in
a sound and prudent manner as prescribed by the Insurance Act
and may result in the BMA exercising its powers of intervention
and investigation and will be a factor in calculating the
operational risk charge under the insurers BSCR model.
Shareholder notification requirements. The BMA
also requires written notification from any person who, directly
or indirectly, becomes a holder of at least 10%, 20%, 33% or 50%
of the voting shares of Allied World Assurance Company Holdings,
AG within 45 days of becoming such a holder. The BMA may
object to such a person if it appears to the BMA that the person
is not fit and proper to be such a holder
and/or
require the shareholder to reduce its holdings or voting rights.
A person that does not give the required notification or comply
with such a notice or direction from the BMA will be guilty of
an offense.
If it appears to the BMA that there is a risk of Allied World
Assurance Company, Ltd becoming insolvent, or that Allied World
Assurance Company, Ltd is in breach of the Insurance Act or any
conditions imposed upon its registration, the BMA may take
numerous restrictive actions to protect the public interest,
including cancelling our registration under the Insurance Act.
Ireland
Allied World Assurance Company (Europe) Limited is authorized as
a non-life insurance undertaking and is regulated by the CBI
pursuant to the Insurance Acts 1909 to 2000, the Central Bank
Acts 1942 to 2010, and all statutory instruments relating to
insurance made or adopted under the European Communities Acts
1972 to 2009 (the Irish Insurance Acts and
Regulations). The Third Non-Life Directive of the European
Union (the Non-Life Directive) established a common
framework for the authorization and regulation of non-life
insurance undertakings within the EU. The Non-Life Directive
permits non-life insurance undertakings authorized in a member
state of the EU to operate in other member states of the EU
either directly from the home member state (on a freedom to
provide services basis) or through local branches (by way of
permanent establishment). Allied World Assurance Company
(Europe) Limited operates a branch office in the United Kingdom
on a freedom to provide services basis in other European Union
member states.
Allied World Assurance Company (Reinsurance) Limited is
regulated by the CBI pursuant to the Central Bank Acts 1942 to
2010 and the provisions of the European Communities
(Reinsurance) Regulations 2006 (which transposed the E.U.
Reinsurance Directive into Irish law) and operates branches in
London, England and Zug, Switzerland. Pursuant to the provisions
of these regulations, reinsurance undertakings may, subject to
the satisfaction of certain formalities, carry on reinsurance
business in other EU member states either directly from the home
member state (on a freedom to provide services basis) or through
local branches (by way of permanent establishment).
United
States
Our U.S. insurance and reinsurance subsidiaries are
admitted or surplus line eligible in all 50 states and the
District of Columbia. Allied World Assurance Company (U.S.) Inc.
is admitted in three states, including Delaware, its state of
domicile, surplus lines eligible in 49 jurisdictions, including
the District of Columbia and Puerto Rico, and an accredited
reinsurer in 38 jurisdictions, including the District of
Columbia. Allied World National Assurance Company is admitted in
43 jurisdictions, including New Hampshire, its state of
domicile, surplus lines eligible in three states and an
accredited reinsurer in one state. Allied World Reinsurance
Company is admitted to write insurance and reinsurance in all
50 states, including New Hampshire, its state of domicile,
and the District of Columbia. Darwin National Assurance Company
is domiciled in Delaware and admitted to write in all other
U.S. jurisdictions except Arkansas. Darwin Select Insurance
Company, which is an Arkansas company, is admitted in that state
and is an eligible surplus lines writer in all other states and
the District of Columbia, and Vantapro Specialty Insurance
Company, which is an Arkansas company, is currently admitted
only in Arkansas and Illinois.
23
Our U.S. admitted and authorized insurers and reinsurers
are subject to considerable regulation and supervision by state
insurance regulators. The extent of regulation varies but
generally has its source in statutes that delegate regulatory,
supervisory and administrative authority to a department of
insurance in each state. Among other things, state insurance
commissioners regulate insurer solvency standards, insurer and
agent licensing, authorized investments, premium rates,
restrictions on the size of risks that may be insured under a
single policy, loss and expense reserves and provisions for
unearned premiums, and deposits of securities for the benefit of
policyholders. The states regulatory schemes also extend
to policy form approval and market conduct regulation. In
addition, some states have enacted variations of competitive
rate making laws, which allow insurers to set premium rates for
certain classes of insurance without obtaining the prior
approval of the state insurance department. State insurance
departments also conduct periodic examinations of the affairs of
authorized insurance companies and require the filing of annual
and other reports relating to the financial condition of
companies and other matters.
Holding Company Regulation. Our
U.S. insurance subsidiaries are subject to regulation under
the insurance holding company laws of certain states. The
insurance holding company laws and regulations vary by state,
but generally require admitted insurers that are subsidiaries of
insurance holding companies to register and file with state
regulatory authorities certain reports including information
concerning their capital structure, ownership, financial
condition and general business operations. Generally, all
transactions involving the insurers in a holding company system
and their affiliates must be fair and, if material, require
prior notice and approval or non-disapproval by the state
insurance department.
State insurance holding company laws typically place limitations
on the amounts of dividends or other distributions payable by
insurers. These limitations vary by state, but generally are
based on statutory surplus, statutory net income and investment
income. Delaware allows us to pay ordinary dividends without the
prior approval of its insurance commissioner so long as the
dividend is paid out of earned surplus (as defined under
Delaware law). New Hampshire requires 15 days notice to its
insurance commissioner prior to paying an ordinary dividend,
provided that our surplus with regard to policyholders following
such dividend payment would be adequate and could not lead to a
hazardous financial condition. Arkansas allows us to pay
ordinary dividends upon ten business days prior notice to its
insurance commissioner. For extraordinary dividends, each state
requires 30 days prior notice to and non-disapproval of its
insurance commissioner before being declared. An extraordinary
dividend generally includes any dividend whose fair market value
together with that of other dividends or distributions made
within the preceding 12 months exceeds the greater of:
(1) 10% of the insurers surplus as regards
policyholders as of December 31 of the prior year, or
(2) the net income of the insurer, not including realized
capital gains, for the
12-month
period ending December 31 of the prior year, but does not
include pro rata distributions of any class of the
insurers own securities.
State insurance holding company laws also require prior notice
and state insurance department approval of changes in control of
an insurer or its holding company. Under the insurance laws of
Delaware, New Hampshire and Arkansas, any beneficial owner of
10% or more of the outstanding voting securities of an insurance
company or its holding company is presumed to have acquired
control, unless this presumption is rebutted.
Guaranty Fund Assessments. Virtually all
states require admitted insurers to participate in various forms
of guaranty associations in order to bear a portion of the loss
suffered by certain insureds caused by the insolvency of other
insurers. Depending upon state law, insurers can be assessed an
amount that is generally equal to between 1% and 2% of the
annual premiums written for the relevant lines of insurance in
that state to pay the claims of insolvent insurers. Most of
these assessments are recoverable through premium rates, premium
tax credits or policy surcharges.
Involuntary Pools. In the states where they
are admitted, our insurance subsidiaries are also required to
participate in various involuntary assigned risk pools,
principally involving workers compensation and automobile
insurance, which provide various insurance coverages to
individuals or other entities that otherwise are unable to
purchase such coverage in the voluntary market. Participation in
these pools in most states is generally in proportion to
voluntary writings of related lines of business in that state.
Risk-Based Capital. U.S. insurers are
also subject to risk-based capital (or RBC)
guidelines that provide a method to measure the total adjusted
capital (statutory capital and surplus plus other adjustments)
of insurance companies taking into account the risk
characteristics of the companys investments and products.
The RBC
24
formulas establish capital requirements for four categories of
risk: asset risk, insurance risk, interest rate risk and
business risk. As of December 31, 2010, we believe all of
our U.S. insurance and reinsurance subsidiaries had
adjusted capital in excess of amounts requiring company or
regulatory action.
NAIC Ratios. The National Association of
Insurance Commissioners (NAIC) Insurance Regulatory
Information System, or IRIS, was developed to help state
regulators identify companies that may require special
attention. IRIS is comprised of statistical and analytical
phases consisting of key financial ratios whereby financial
examiners review annual statutory basis statements and financial
ratios. Each ratio has an established usual range of
results and assists state insurance departments in executing
their statutory mandate to oversee the financial condition of
insurance companies. As of December 31, 2010, we do not
believe that any of our U.S. insurance and reinsurance
subsidiaries had an IRIS ratio range warranting any regulatory
action.
Surplus Lines Regulation. The regulation of
our U.S. subsidiaries excess and surplus lines
insurance business differs significantly from their regulation
as admitted or authorized insurers. These companies are subject
to the surplus lines regulation and reporting requirements of
the jurisdictions in which they are eligible to write surplus
lines insurance. Allied World Assurance Company (U.S.) Inc. and
Darwin Select Insurance Company, which conduct business on a
surplus lines basis in a particular state, are generally exempt
from that states guaranty fund laws and from participation
in its involuntary pools. Although surplus lines business is
generally less regulated than the admitted market, strict
regulations apply to surplus lines placements under the laws of
every state, and the regulation of surplus lines insurance may
undergo changes in the future. Federal
and/or state
measures may be introduced and promulgated that would result in
increased oversight and regulation of surplus lines insurance.
Lloyds
of London
General. Syndicate 2232 was licensed to start
underwriting certain lines of insurance and reinsurance business
effective June 2010. Allied World Capital (Europe) Limited is
the sole corporate member of Syndicate 2232. Syndicate 2232 is
managed by Capita Managing Agency Limited, an unaffiliated
entity (Capita).
Lloyds intervention powers. As a member
of Lloyds, Allied World Capital (Europe) Limited is
obliged to comply with Lloyds bye laws and regulations
(made pursuant to the Lloyds Acts 1871 to 1982) and
applicable provisions of the Financial and Services and Markets
Act 2000 (the FSMA). The Council of Lloyds has
wide discretionary powers to regulate members underwriting
at Lloyds and its exercise of these powers might affect
the return on an investment of the corporate member in a given
underwriting year.
Capital requirements. The capital required to
support a Syndicates underwriting capacity, referred to as
funds at Lloyds, is assessed annually and is
determined by Lloyds in accordance with the capital
adequacy rules established by the FSA. If a member of
Lloyds is unable to pay its debts to policyholders, such
debts may be payable from the Lloyds Central Fund, which
in many respects acts as an equivalent to a state guaranty fund
in the United States. If Lloyds determines that the
Central Fund needs to be increased, it has the power to assess
premium levies on current Lloyds members. The Council of
Lloyds has discretion to call or assess up to 3% of a
members underwriting capacity in any one year as a Central
Fund contribution.
Our business plan, including the maximum underwriting capacity,
for Syndicate 2232 requires annual approval by Lloyds. The
Lloyds Franchise Board may require changes to any business
plan and may also require the provision of additional capital to
support an approved business plan. If material changes in the
business plan for Syndicate 2232 were required by Lloyds
or if charges and assessments payable by Allied World Capital
(Europe) Limited to Lloyds were to increase significantly,
these events could have an adverse effect on the operations and
financial results of Allied World Capital (Europe) Limited.
The Company has provided capital to support the underwriting of
Syndicate 2232 in the form of a letter of credit. An
underwriting year of account is closed by way of reinsurance to
close on the third anniversary of the inception of the relevant
underwriting year. Upon the closing of an underwriting year, a
profit or loss will be declared for the closed year of account.
Prior to the closure of an underwriting year, funds at
Lloyds cannot typically be reduced unless the
consent of Lloyds is obtained and such consent will only
be considered where a member has surplus funds at
Lloyds. Lloyds approval is also required
before any person can acquire control of a Lloyds managing
agent or Lloyds corporate member.
25
FSA regulation. Lloyds is authorized by
the FSA and required to implement certain rules prescribed by
the FSA under the Lloyds Act of 1982 regarding the
operation of the Lloyds market. With respect to managing
agents and corporate members, Lloyds prescribes certain
minimum standards relating to management and control, solvency
and other requirements and monitors managing agents
compliance with such standards. Future regulatory changes or
rulings by the FSA could impact the business strategy or
financial assumptions made by Capita
and/or
Allied World Capital (Europe) Limited and such impact could
adversely affect the Syndicate 2232s financial conditions
and results.
Other applicable laws. Lloyds worldwide
insurance and reinsurance business is subject to various laws,
regulations, treaties and policies of the EU as well as each
jurisdiction in which it operates. Material changes in
governmental requirements or laws could have an adverse effect
on Lloyds and its member companies, including Allied World
Capital (Europe) Limited.
Asia
In March 2009, Allied World Assurance Company, Ltd received
regulatory approval from the Office of the Insurance
Commissioner in Hong Kong to operate as a branch office from
which it conducts general insurance business in certain
specified classes under Section 8 of the Insurance
Companies Ordinance.
In December 2009, Allied World Assurance Company, Ltd received
regulatory approval from the Monetary Authority of Singapore to
operate a branch office from which it conducts general insurance
and reinsurance business under Section 8 of the Insurance
Act.
Factors that could cause our actual results to differ materially
from those in the forward-looking statements contained in this
Annual Report on
Form 10-K
and other documents we file with the SEC include the following:
Risks
Related to Our Company
Downgrades
or the revocation of our financial strength ratings would affect
our standing among brokers and customers and may cause our
premiums and earnings to decrease significantly.
Ratings have become an increasingly important factor in
establishing the competitive position of insurance and
reinsurance companies. Each rating is subject to periodic review
by, and may be revised downward or revoked at the sole
discretion of, the rating agency. The ratings are neither an
evaluation directed to our investors nor a recommendation to
buy, sell or hold our securities. For the financial strength
rating of each of our principal operating subsidiaries, please
see Item 1. Business Our Financial
Strength Ratings.
If the rating of any of our subsidiaries is revised downward or
revoked, our competitive position in the insurance and
reinsurance industry may suffer, and it may be more difficult
for us to market our products. Specifically, any revision or
revocation of this kind could result in a significant reduction
in the number of insurance and reinsurance contracts we write
and in a substantial loss of business as customers and brokers
that place this business move to competitors with higher
financial strength ratings.
Additionally, it is common for our reinsurance contracts to
contain terms that would allow the ceding companies to cancel
the contract for the portion of our obligations if our insurance
subsidiaries are downgraded below an A- by either A.M. Best
or Standard & Poors. Whether a ceding company
would exercise the cancellation right (and, in the case of
Allied World Reinsurance Company, as described in the paragraph
below, the right to require the posting of security) would
depend, among other factors, on the reason for such downgrade,
the extent of the downgrade, the prevailing market conditions
and the pricing and availability of replacement reinsurance
coverage. Therefore, we cannot predict in advance the extent to
which these rights would be exercised, if at all, or what effect
any such cancellations or security postings would have on our
financial condition or future operations, but such effect could
be material.
For example, if all ceding companies for which we have in force
business as of December 31, 2010 were to exercise their
cancellation rights or require the posting of security, the
estimated impact could result in the return of
26
premium, the commutation of loss reserves, the posting of
additional collateral or a combination thereof, the notional
value of which could be approximately $290.3 million.
Our U.S. reinsurance subsidiary, Allied World Reinsurance
Company, does not typically post security for the reinsurance
contracts it writes. In addition to the cancellation right
discussed above, should the companys A.M. Best rating
or Standard & Poors rating be downgraded below
A-, some ceding companies would have the right to require Allied
World Reinsurance Company to post security for its portion of
the obligations under such contracts. If this were to occur,
Allied World Reinsurance Company may not have the liquidity to
post security as stipulated in such reinsurance contracts.
All Lloyds syndicates benefit from Lloyds central
resources, including the Lloyds brand, its network of
global licenses and the central fund. The central fund is
available at the discretion of the Council of Lloyds to
meet any valid claim that cannot be met by the resources of any
member. Because all Lloyds policies are ultimately backed
by the central fund, a single market rating can be applied. The
ability of Lloyds syndicates to trade in certain classes
of business at current levels is dependent on the maintenance of
a satisfactory credit rating issued by an accredited rating
agency. A. M. Best has assigned Lloyds a financial
strength rating of A (Excellent) and
Standard & Poors and Fitch Ratings have assigned
Lloyds a financial strength rating of A+
(Strong). Syndicate 2232 benefits from Lloyds current
ratings and would be adversely affected if the current ratings
were downgraded from their present levels.
We also cannot assure you that A.M. Best,
Standard & Poors or Moodys will not
downgrade our insurance subsidiaries.
Actual
claims may exceed our reserves for losses and loss
expenses.
Our success depends on our ability to accurately assess the
risks associated with the businesses that we insure and
reinsure. We establish loss reserves to cover our estimated
liability for the payment of all losses and loss expenses
incurred with respect to the policies we write. Loss reserves do
not represent an exact calculation of liability. Rather, loss
reserves are estimates of what we expect the ultimate resolution
and administration of claims will cost. These estimates are
based on actuarial and statistical projections and on our
assessment of currently available data, as well as estimates of
future trends in claims severity and frequency, judicial
theories of liability and other factors. Loss reserve estimates
are refined as experience develops and claims are reported and
resolved. Establishing an appropriate level of loss reserves is
an inherently uncertain process. It is therefore possible that
our reserves at any given time will prove to be inadequate.
To the extent we determine that actual losses or loss expenses
exceed our expectations and reserves reflected in our financial
statements, we will be required to increase our reserves to
reflect our changed expectations. This could cause a material
increase in our liabilities and a reduction in our
profitability, including operating losses and a reduction of
capital. Our results for the year ended December 31, 2010
included $369.8 million and $56.4 million of favorable
(i.e., a loss reserve decrease) and adverse development (i.e., a
loss reserve increase), respectively, of reserves relating to
losses incurred for prior loss years. In comparison, our results
for the year ended December 31, 2009 included
$376.9 million and $128.9 million of favorable and
adverse development, respectively, of reserves relating to
losses incurred for prior loss years. Our results for the year
ended December 31, 2008 included $330.5 million and
$50.4 million of favorable and adverse development,
respectively, of reserves relating to losses incurred for prior
loss years.
We have estimated our net losses from catastrophes based on
actuarial analyses of claims information received to date,
industry modeling and discussions with individual insureds and
reinsureds. Accordingly, actual losses may vary from those
estimated and will be adjusted in the period in which further
information becomes available.
We may
experience significant losses and volatility in our financial
results from catastrophic events.
As a multi-line casualty and property insurer and reinsurer, we
may experience significant losses from claims arising out of
catastrophic events, particularly from our direct property
insurance operations and our property, workers compensation and
personal accident reinsurance operations. Catastrophes can be
caused by various unpredictable events, including earthquakes,
volcanic eruptions, hurricanes, windstorms, hailstorms, severe
winter
27
weather, floods, fires, tornadoes, explosions and other natural
or man-made disasters, including oil spills and other
environmental contamination. The international geographic
distribution of our business subjects us to catastrophe exposure
from natural events occurring in a number of areas throughout
the world, examples of which include floods and windstorms in
Europe, hurricanes and windstorms in Mexico, Florida, the Gulf
Coast and the Atlantic Coast regions of the United States,
typhoons and earthquakes in Japan and Taiwan, and earthquakes in
California and parts of the Midwestern United States known as
the New Madrid zone. Our largest exposure to wind events is
concentrated in the Southeast and Gulf Coast of the United
States. Our largest exposure to earthquake events is
concentrated in California. The loss experience of catastrophe
insurers and reinsurers has historically been characterized as
low frequency but high severity in nature. In recent years, the
frequency of major catastrophes appears to have increased and
may continue to increase as a result of global climate change
and other factors. Increases in the values and concentrations of
insured property and the effects of inflation have resulted in
increased severity of losses to the industry in recent years,
and we expect this trend to continue.
The loss limitation methods we employ, such as establishing
maximum aggregate exposed limits on policies written in key
coastal and other defined geographical zones, restrictive
underwriting guidelines and purchasing reinsurance, may not be
sufficient protection against losses from catastrophes. In the
event we do not accurately estimate losses from catastrophes
that have already occurred, there is a possibility that loss
reserves for such catastrophes will be inadequate to cover the
losses. Because U.S. GAAP does not permit insurers and
reinsurers to reserve for catastrophes until they occur, claims
from these events could cause substantial volatility in our
financial results for any fiscal quarter or year and could have
a material adverse effect on our financial condition and results
of operations. In addition, losses from catastrophic events
could result in downward revisions to our financial strength
ratings from the various rating agencies that cover us.
The
risk models we use to quantify catastrophe exposures and risk
accumulations may prove inadequate in predicting all outcomes
from potential catastrophe events.
We use widely accepted and industry-recognized catastrophe risk
modeling programs to help us quantify our aggregate exposure to
any one event. As with any model of physical systems,
particularly those with low frequencies of occurrence and
potentially high severity of outcomes, the accuracy of the
models predictions is largely dependent on the accuracy
and quality of the data provided in the underwriting process and
the judgments of our employees and other industry professionals.
These models do not anticipate all potential perils or events
that could result in a catastrophic loss to us. Furthermore, it
is often difficult for models to anticipate and incorporate
events that have not been experienced during or as a result of
prior catastrophes. Accordingly, it is possible for us to be
subject to events or contingencies that have not been
anticipated by our catastrophe risk models and which could have
a material adverse effect on our reserves and results of
operations.
We may
be adversely impacted by inflation.
Our operations, like those of other property and casualty
insurers and reinsurers, are susceptible to the effects of
inflation because premiums are established before the ultimate
amounts of loss and loss adjustment expense are known. Although
we consider the potential effects of inflation when setting
premium rates, our premiums may not fully offset the effects of
inflation and essentially result in our under pricing the risks
we insure and reinsure. Our reserve for losses and loss
adjustment expenses includes assumptions about future payments
for settlement of claims and claims-handling expenses, such as
the value of replacing property and associated labor costs for
the property business we write, the value of medical treatments
and litigation costs. To the extent inflation causes theses
costs to increase above reserves established for these claims,
we will be required to increase our loss reserves with a
corresponding reduction in our net income in the period in which
the deficiency is identified, which may have a material adverse
effect on our financial condition and results of operations.
We
could face losses from terrorism and political
unrest.
We have exposure to losses resulting from acts of terrorism and
political instability. Although we generally exclude acts of
terrorism from our property insurance policies and property
reinsurance treaties where practicable, we provide coverage in
circumstances where we believe we are adequately compensated for
assuming those risks.
28
Our trade credit and political risk insurance program protects
insureds with interests in foreign jurisdictions in the event
governmental action prevents them from exercising their
contractual rights and may also protect their assets against
physical damage perils. This may include risks arising from
expropriation, forced abandonment, license cancellation, trade
embargo, contract frustration, non-payment, war on land or
political violence, including terrorism, revolution,
insurrection and civil unrest. Political risk insurance is
typically provided to financial institutions, equity investors,
exporters, importers, export credit agencies and multilateral
agencies in an array of industries, in connection with
investments and contracts in both emerging markets and developed
countries.
Our trade credit and political risk insurance program also
protects insureds in foreign jurisdictions against non-payment
coverage on specific loan obligations as a result of commercial
as well as political risk events. We attempt to manage our
exposure, by among other things, setting credit limits by
country, region, industry and individual counterparty and
regularly reviewing our aggregate exposures. The occurrence of
one or more large losses in our credit and political risk
insurance portfolio could have a material adverse effect on our
results of operations or financial condition.
We
could face losses from pandemic diseases.
A pandemic disease could also cause us to suffer significantly
increased insurance losses on a variety of coverages we offer.
Our reinsurance protections may only partially offset these
losses. Moreover, even in cases where we seek to exclude
coverage, we may not be able to completely eliminate our
exposure to these events. It is impossible to predict the timing
or severity of these events with statistical certainty or to
estimate the amount of loss that any given occurrence will
generate. We could also suffer losses from a disruption of our
business operations and our investments may suffer a decrease in
value due to the occurrence of any of these events. To the
extent we suffer losses from these risks, such losses could be
significant.
Our
business and our financial results may be adversely affected by
unexpected levels of loss due to climate change.
A substantial portion of our revenues are derived from the
underwriting of property insurance and reinsurance around the
world. Therefore, large scale climate change (often referred to
as global warming) as well as changing ocean
temperatures could increase the frequency and severity of our
loss costs related to property damage
and/or
business interruption due to hurricanes, windstorms, flooding,
blizzards, tornadoes or other severe weather events particularly
with respect to properties located in coastal areas.
Additionally, if changes in climatic patterns and ocean
temperature conditions continue, it is likely that such changes
will further impair the ability to predict the frequency and
severity of future weather-related disasters in many parts of
the world. Over the longer term, such decreased predictability
will create additional uncertainty as to future trends and
exposures. In addition to unexpected increases in covered losses
and decreased predictability, global climate change may also
give rise to new environmental liability claims against
policyholders that compete in the energy, automobile
manufacturing and other industries that we serve. There would be
an increase in claims against policyholders of directors and
officers liability of related management liability policies
alleging a failure to supervise, manage or properly disclose
climate change exposures. We may also incur
greater-than-expected
expense levels due to the costs involved in responding to
regulators, rating agencies and other interested constituencies
with respect to climate change and other environmental
disclosures.
The perceived effects of climate change on debt obligations can
impact our investment mix in any one issuer, industry or region.
The largest per-issuer exposure, outside of government and
government-related issuers, represented 1% of our investment
portfolio and the largest ten exposures represented less than 7%
of the portfolio.
The
failure of any of the loss limitation methods we employ could
have a material adverse effect on our financial condition or
results of operations.
We seek to limit our loss exposure by adhering to maximum
limitations on policies written in defined geographical zones
(which limits our exposure to losses in any one geographic
area), limiting program size for each client (which limits our
exposure to losses with respect to any one client), adjusting
retention levels and establishing per risk and per occurrence
limitations for each event and establishing prudent underwriting
guidelines for each
29
insurance program written (all of which limit our liability on
any one policy). Most of our direct liability insurance policies
include maximum aggregate limitations. We cannot assure you that
any of these loss limitation methods will be effective. In
particular, geographic zone limitations involve significant
underwriting judgments, including the determination of the areas
of the zones and whether a policy falls within particular zone
limits. Disputes relating to coverage and choice of legal forum
may also arise. As a result, various provisions of our policies
that are designed to limit our risks, such as limitations or
exclusions from coverage (which limit the range and amount of
liability to which we are exposed on a policy) or choice of
forum (which provides us with a predictable set of laws to
govern our policies and the ability to lower costs by retaining
legal counsel in fewer jurisdictions), may not be enforceable in
the manner we intend and some or all of our other loss
limitation methods may prove to be ineffective. One or more
catastrophic or other events could result in claims and expenses
that substantially exceed our expectations and could have a
material adverse effect on our results of operations.
A
prolonged recession and other adverse consequences as a result
of the turmoil in the U.S. and international financial markets
could harm our business, liquidity and financial condition, and
our share price.
The U.S. and international financial markets have been
severely disrupted. These conditions, including the possibility
of a prolonged recession, may potentially affect various aspects
of our business, including the demand for and claims made under
our products, our counterparty credit risk and the ability of
our customers, counterparties and others to establish or
maintain their relationships with us, our ability to access and
efficiently use internal and external capital resources and our
investment performance. Continued volatility in the
U.S. and other securities markets may also adversely affect
our share price.
We may
be impacted from claims relating to the financial market
turmoil, including subprime and other credit and insurance
exposures, beyond our current estimates.
We write corporate directors and officers, errors and omissions
and other insurance coverages for financial institutions and
financial services companies. We also write liability coverages
for fiduciaries of pension funds. In addition, we also reinsure
other insurance companies that write these types of coverages.
The financial institutions and financial services segment has
been particularly impacted by the financial market turmoil. As a
result, this industry segment has been the subject of heightened
scrutiny and in some cases investigations by regulators with
respect to the industrys actions as they relate to
subprime mortgages, collateralized debt obligations, structured
investment vehicles, swap and derivative transactions and
executive compensation. During this time, a number of
U.S. and international financial institutions, insurance
companies and other companies have failed, been acquired under
distressed circumstances, become reliant upon the central
governments of their jurisdictions for financial assistance to
remain solvent
and/or
suffered significant declines in their stock price.
Additionally, there have been instances of fraud, most notably
being the claims brought against the founder and chief executive
officer of Bernard L. Madoff Investment Securities LLC, R. Allen
Stanford and Galleon Group LLC. Similar or other claims may be
made against other financial institutions and members of other
industries, including the insurance industry. These events may
give rise to increased litigation, including class action suits,
which may involve our insureds. To the extent we have claims
relating to these events, it could cause substantial volatility
in our financial results and could have a material adverse
effect on our financial condition and results of operations.
For
our reinsurance business, we depend on the policies, procedures
and expertise of ceding companies; these companies may fail to
accurately assess the risks they underwrite which may lead us to
inaccurately assess the risks we assume.
Because we participate in reinsurance markets, the success of
our reinsurance underwriting efforts depends in part on the
policies, procedures and expertise of the ceding companies
making the original underwriting decisions (when an insurer
transfers some or all of its risk to a reinsurer, the insurer is
sometimes referred to as a ceding company).
Underwriting is a matter of judgment, involving important
assumptions about matters that are inherently unpredictable and
beyond the ceding companies control and for which
historical experience and statistical analysis may not provide
sufficient guidance. We face the risk that the ceding companies
may fail to accurately assess the risks they underwrite, which,
in turn, may lead us to inaccurately assess the risks we assume
as
30
reinsurance; if this occurs, the premiums that are ceded to us
may not adequately compensate us and we could face significant
losses on these reinsurance contracts.
The
availability and cost of security arrangements for reinsurance
transactions may materially impact our ability to provide
reinsurance from Bermuda to insurers domiciled in the United
States.
Allied World Assurance Company, Ltd, our Bermuda insurance and
reinsurance company, is not admitted as an insurer, nor is it
accredited as a reinsurer, in any jurisdiction in the United
States. As a result, it is required to post collateral security
with respect to any reinsurance liabilities it assumes from
ceding insurers domiciled in the United States in order for
U.S. ceding companies to obtain credit on their
U.S. statutory financial statements with respect to the
insurance liabilities ceded to them. Under applicable statutory
provisions, the security arrangements may be in the form of
letters of credit, reinsurance trusts maintained by trustees or
funds-withheld arrangements where assets are held by the ceding
company. Allied World Assurance Company, Ltd uses trust accounts
and has access to up to $1.7 billion in letters of credit
under two letter of credit facilities. The letter of credit
facilities impose restrictive covenants, including restrictions
on asset sales, limitations on the incurrence of certain liens
and required collateral and financial strength levels.
Violations of these or other covenants could result in the
suspension of access to letters of credit or such letters of
credit becoming due and payable. Our access to our existing
letter of credit facilities is dependent on the ability of the
banks that are parties to these facilities to meet their
commitments. Our $900 million letter of credit facility
with Citibank Europe plc is on an uncommitted basis, which means
Citibank Europe has agreed to offer us up to $900 million
in letters of credit, but they are not contractually obligated
for that full amount. The lenders under our letter of credit
facilities may not be able to meet their commitments if they
become insolvent, file for bankruptcy protection or if they
otherwise experience shortages of capital and liquidity. If
these letter of credit facilities are not sufficient or drawable
or if Allied World Assurance Company, Ltd is unable to renew
either or both of these facilities or to arrange for trust
accounts or other types of security on commercially acceptable
terms, its ability to provide reinsurance to
U.S.-domiciled
insurers may be severely limited and adversely affected.
In addition, security arrangements with ceding insurers may
subject our assets to security interests or may require that a
portion of our assets be pledged to, or otherwise held by, third
parties. Although the investment income derived from our assets
while held in trust typically accrues to our benefit, the
investment of these assets is governed by the terms of the
letter of credit facilities and the investment regulations of
the state of domicile of the ceding insurer, which generally
regulate the amount and quality of investments permitted and
which may be more restrictive than the investment regulations
applicable to us under Bermuda law. These restrictions may
result in lower investment yields on these assets, which could
adversely affect our profitability.
We
depend on a small number of brokers for a large portion of our
revenues. The loss of business provided by any one of them could
adversely affect us.
We market our insurance and reinsurance products worldwide
through insurance and reinsurance brokers. For the year ended
December 31, 2010, our top three brokers represented
approximately 53% of our total gross premiums written. Marsh,
Aon (including Benfield Group Ltd.) and Willis were responsible
for the distribution of approximately 24%, 20% and 9%,
respectively, of our total gross premiums written for the year
ended December 31, 2010. Loss of all or a substantial
portion of the business produced by any one of those brokers
could have a material adverse effect on our financial condition,
results of operations and business.
Our
reliance on brokers subjects us to their credit
risk.
In accordance with industry practice, we frequently pay amounts
owed on claims under our insurance and reinsurance contracts to
brokers, and these brokers, in turn, pay these amounts to the
customers that have purchased insurance or reinsurance from us.
If a broker fails to make such a payment, it is likely that, in
most cases, we will be liable to the client for the deficiency
because of local laws or contractual obligations. Likewise, when
a customer pays premiums for policies written by us to a broker
for further payment to us, these premiums are generally
considered to have been paid and, in most cases, the client will
no longer be liable to us for those amounts, whether or not we
actually receive the premiums. Consequently, we assume a degree
of credit risk associated with the brokers we use with respect
to our insurance and reinsurance business.
31
We may
be unable to purchase reinsurance for our own account on
commercially acceptable terms or to collect under any
reinsurance we have purchased.
We acquire reinsurance purchased for our own account to mitigate
the effects of large or multiple losses on our financial
condition. From time to time, market conditions have limited,
and in some cases prevented, insurers and reinsurers from
obtaining the types and amounts of reinsurance they consider
adequate for their business needs. For example, following the
events of September 11, 2001, terms and conditions in the
reinsurance markets generally became less attractive to buyers
of such coverage. Similar conditions may occur at any time in
the future and we may not be able to purchase reinsurance in the
areas and for the amounts required or desired. Even if
reinsurance is generally available, we may not be able to
negotiate terms that we deem appropriate or acceptable or to
obtain coverage from entities with satisfactory financial
resources.
In addition, the recent financial market turmoil may
significantly adversely affect the ability of our reinsurers and
retrocessionaires to meet their obligations to us. A
reinsurers insolvency, or inability or refusal to make
payments under a reinsurance or retrocessional reinsurance
agreement with us, could have a material adverse effect on our
financial condition and results of operations because we remain
liable to the insured under the corresponding coverages written
by us.
Our
investment performance may adversely affect our financial
performance and ability to conduct business.
We derive a significant portion of our income from our invested
assets. As a result, our operating results depend in part on the
performance of our investment portfolio. Ongoing conditions in
the U.S. and international financial markets have and could
continue to adversely affect our investment portfolio. Depending
on market conditions, we could incur additional losses in future
periods, which could have a material adverse effect on our
financial condition, results of operations and business.
Our investment portfolio is overseen by our Chief Investment
Officer and managed by professional investment management firms
in accordance with the Investment Policy Statement approved by
the Investment Committee of the Board of Directors. Our
investment performance is subject to a variety of risks,
including risks related to general economic conditions, market
volatility and interest rate fluctuations, liquidity risk, and
credit and default risk. Additionally, with respect to some of
our investments, we are subject to pre-payment or reinvestment
risk. Our current Investment Policy Statement contains the
amount of our investment portfolio that may be invested in
public and private equities, preferred equities, non-investment
grade investments and hedge funds. As a result, we may be
subject to restrictions on redemption, which may limit our
ability to withdraw funds or realize on such investments for
some period of time after our initial investment. The values of,
and returns on, such investments may also be more volatile. In
addition, investments in hedge funds may involve certain other
risks, including the limited operating history of a fund as well
as risks associated with the strategies employed by the managers
of the fund.
Because of the unpredictable nature of losses that may arise
under insurance or reinsurance policies written by us, our
liquidity needs could be substantial and may arise at any time.
To the extent we are unsuccessful in managing our investment
portfolio within the context of our expected liabilities, we may
be forced to liquidate our investments at times and prices that
are not optimal, or we may have difficulty in liquidating some
of our alternative investments due to restrictions on sales,
transfers and redemptions noted above. This could have a
material adverse effect on the performance of our investment
portfolio. If our liquidity needs or general liability profile
unexpectedly change, we may not be successful in continuing to
structure our investment portfolio in its current manner. In
addition, investment losses could significantly decrease our
book value, thereby affecting our ability to conduct business.
While we maintain an investment portfolio with instruments rated
highly by the recognized rating agencies, there are no
assurances that these high ratings will be maintained. Over the
past several years companies with highly-rated debt have filed
for bankruptcy. The assignment of a high credit rating does not
preclude the potential for the risk of default on any investment
instrument.
32
Any
increase in interest rates and/or credit spread levels could
result in significant losses in the fair value of our investment
portfolio.
Our investment portfolio contains interest-rate-sensitive
instruments that may be adversely affected by changes in
interest rates. Fluctuations in interest rates affect our
returns on fixed income investments. Generally, investment
income will be reduced during sustained periods of lower
interest rates as higher-yielding fixed income securities are
called, mature or are sold and the proceeds reinvested at lower
rates. During periods of rising interest rates, prices of fixed
income securities tend to fall and realized gains upon their
sale are reduced. Interest rates are highly sensitive to many
factors, including governmental monetary policies, domestic and
international economic and political conditions and other
factors beyond our control. We may not be able to effectively
mitigate interest rate sensitivity. In particular, a significant
increase in interest rates could result in significant losses,
realized or unrealized, in the fair value of our investment
portfolio and, consequently, could have a material adverse
effect on our financial condition and results of operations.
Additionally, changes in the credit spread (the difference in
the percentage yield) between U.S. Treasury securities and
non-U.S. Treasury
securities may negatively impact our investment portfolio as we
may not be able to effectively mitigate credit spread
sensitivity. In particular, a significant increase in credit
spreads could result in significant losses, realized or
unrealized, in the fair value of our investment portfolio and,
consequently, could have a material adverse effect on our
financial condition and results of operations.
In addition, our investment portfolio includes
U.S. government agency and non-agency commercial and
residential mortgage-backed securities. As of December 31,
2010, mortgage-backed securities constituted approximately 22%
of the fair value of our total investments and cash and cash
equivalents, of which 15% of the fair value was invested in
U.S. government agency mortgage-backed securities. Changes
in interest rates can expose us to prepayment risks on these
investments. In periods of declining interest rates, mortgage
prepayments generally increase and mortgage-backed securities
are generally prepaid more quickly, requiring us to reinvest the
proceeds at the then current market rates. In periods of rising
interest rates, mortgage-backed securities may have declining
levels of prepayments, extending their maturity and duration,
thereby negatively impacting the securitys price.
Delinquencies, defaults and losses with respect to non-agency
commercial and residential mortgage loans have increased and may
continue to increase. In addition, residential property values
in many states have declined, after extended periods during
which those values appreciated. A continued decline or an
extended flattening in those values may result in additional
increases in delinquencies and losses on residential mortgage
loans generally, especially with respect to second homes and
investor properties, and with respect to any residential
mortgage loans where the aggregate loan amounts (including any
subordinate loans) are close to or greater than the related
property values. Additionally as of December 31, 2010,
commercial mortgage-backed securities constituted 2% of the fair
value of our total investments and cash and cash equivalents.
While delinquencies, defaults and losses have been slower to
materialize in the commercial sector than in the residential
sector, we believe that the next 12 to 24 months may see
increasing problems for the commercial real estate market, and
therefore the commercial mortgage-backed securities sector. We
expect this to be most acute in the commercial mortgage-backed
securities offerings issued in 2007 and 2008. As of
December 31, 2010, we had approximately $10 million of
exposure to commercial mortgage-backed securities transactions
of the 2007 and 2008 vintage.
The
valuation of our investments may include methodologies,
estimations and assumptions that are subject to differing
interpretations and could result in changes to investment
valuations that may materially adversely affect our financial
condition or results of operations.
During periods of market disruptions, it may be difficult to
value certain of our securities if trading becomes less frequent
or market data becomes less observable. In addition, there may
be certain asset classes that were in active markets with
significant observable data that become illiquid due to the
recent financial environment. In such cases, the valuation of a
greater number of securities in our investment portfolio may
require more subjectivity and management judgment. As such,
valuations may include inputs and assumptions that are less
observable or require greater estimation as well as valuation
methods that are more sophisticated or require greater
estimation thereby resulting in values which may be less than
the value at which the investments may be ultimately sold.
Further, rapidly changing and unpredictable credit and equity
market conditions could materially affect the valuation of
33
securities as reported within our consolidated financial
statements and the
period-to-period
changes in value could vary significantly. Decreases in value
could have a material adverse effect on our financial condition
and results of operations.
The
determination of the impairments taken on our investments is
highly subjective and could materially impact our financial
position or results of operations.
The determination of the impairments taken on our investments
varies by investment type and is based upon our periodic
evaluations and assessments of known and inherent risks
associated with the respective asset class. Such evaluations and
assessments are revised as conditions change and new information
becomes available. Management updates its evaluations quarterly
and reflects impairments in operations as such evaluations are
revised. There can be no assurance that our management has
accurately assessed the level of impairments taken in our
financial statements. Furthermore, additional impairments may
need to be taken in the future, which could have a material
adverse effect on our financial condition or results of
operations. Historical trends may not be indicative of future
impairments.
We may
be adversely affected by fluctuations in currency exchange
rates.
The U.S. dollar is our reporting currency and the
functional currency of all of our operating subsidiaries. We
enter into insurance and reinsurance contracts where the
premiums receivable and losses payable are denominated in
currencies other than the U.S. dollar. In addition, we
maintain a portion of our investments and liabilities in
currencies other than the U.S. dollar. Assets in
non-U.S. currencies
are generally converted into U.S. dollars at the time of
receipt. When we incur a liability in a
non-U.S. currency,
we carry such liability on our books in the original currency.
These liabilities are converted from the
non-U.S. currency
to U.S. dollars at the time of payment. We may incur
foreign currency exchange gains or losses as we ultimately
receive premiums and settle claims required to be paid in
foreign currencies.
We have currency hedges in place that seek to alleviate our
potential exposure to volatility in foreign exchange rates and
intend to consider the use of additional hedges when we are
advised of known or probable significant losses that will be
paid in currencies other than the U.S. dollar. To the
extent that we do not seek to hedge our foreign currency risk or
our hedges prove ineffective, the impact of a movement in
foreign currency exchange rates could adversely affect our
financial condition or results of operations.
We may
require additional capital in the future that may not be
available to us on commercially favorable terms.
Our future capital requirements depend on many factors,
including our ability to write new business and to establish
premium rates and reserves at levels sufficient to cover losses.
To the extent that the funds generated by insurance premiums
received and sale proceeds and income from our investment
portfolio are insufficient to fund future operating requirements
and cover losses and loss expenses, we may need to raise
additional funds through financings or reduce our assets.
Financial market volatility since 2008 has created uncertainty
in the equity and credit markets and may have affected our
ability, and the ability of others within our industry, to raise
additional capital in the public or private markets. Any future
financing, if available at all, may be on terms that are not
favorable to us. In the case of equity financing, dilution to
our shareholders could result, and the securities issued may
have rights, preferences and privileges that are senior or
otherwise superior to those of our common shares.
Our
business could be adversely affected if we lose any member of
our management team or are unable to attract and retain our
personnel.
Our success depends in substantial part on our ability to
attract and retain our employees who generate and service our
business. We rely substantially on the services of our executive
management team. If we lose the services of any member of our
executive management team, our business could be adversely
affected. If we are unable to attract and retain other talented
personnel, the further implementation of our business strategy
could be impeded. This, in turn, could have a material adverse
effect on our business. We currently have written employment
agreements with our Chief Executive Officer, Chief Financial
Officer, General Counsel, Chief Actuary and the
34
other members of our executive management team. We do not
maintain key man life insurance policies for any of our
employees.
Employee
error and misconduct may be difficult to detect and prevent and
could adversely affect our business, results of operations and
financial condition.
We may experience losses from, among other things, fraud,
errors, the failure to document transactions properly or to
obtain proper internal authorization or the failure to comply
with regulatory or legal requirements. It is not always possible
to deter or prevent employee misconduct and the precautions we
take to prevent and detect this activity may not be effective in
all cases. Losses related to employee error or misconduct could
adversely affect our financial condition, results of operations
and business.
If a
program administrator were to exceed its underwriting authority
or otherwise breach obligations owed to us, we could be
adversely affected.
We write a portion of our U.S. insurance business through
relationships with program administrators, under contracts
pursuant to which we authorize such program administrators to
underwrite and bind business on our behalf, within guidelines we
prescribe. In this structure, we rely on controls incorporated
in the provisions of the program administration agreement, as
well as on the administrators internal controls, to limit
the risks insured to those which are within the prescribed
parameters. Although we monitor program administrators on an
ongoing basis, our monitoring efforts may not be adequate or our
program administrators could exceed their underwriting
authorities or otherwise breach obligations owed to us. We are
liable to policyholders under the terms of policies underwritten
by program administrators, and to the extent such administrators
exceed their authorities or otherwise breach their obligations
to us, our financial condition or results of operations could be
material adversely affected.
If we
experience difficulties with our information technology and
telecommunications systems and/or data security, our ability to
conduct our business might be adversely affected.
We rely heavily on the successful, uninterrupted functioning of
our information technology (IT) and
telecommunications systems. Our business and continued expansion
is highly dependent upon our ability to perform, in an efficient
and uninterrupted fashion, necessary business functions, such as
processing policies, paying claims, performing actuarial and
other modeling functions. A failure of our IT and
telecommunication systems or the termination of third-party
software licenses we rely on in order to maintain such systems
could materially impact our ability to write and process
business, provide customer service, pay claims in a timely
manner or perform other necessary actuarial, legal, financial
and other business functions. Computer viruses, hackers and
other external hazards could expose our IT and data systems to
security breaches that may result in liability to us and cause
us to commit resources, management time and money to prevent or
correct security breaches. If we do not maintain adequate IT and
telecommunications systems, we could experience adverse
consequences, including inadequate information on which to base
critical decisions, the loss of existing customers, difficulty
in attracting new customers, litigation exposures and increased
administrative expenses. As a result, our ability to conduct our
business might be adversely affected.
The
integration of acquired companies, the growth of our operations
through new lines of insurance or reinsurance business, the
expansion into new geographic regions and/or the entering into
joint ventures or partnerships may expose us to operational
risks.
Acquisitions involve numerous risks, including operational,
strategic and financial risks such as potential liabilities
associated with the acquired business. We may experience
difficulties in integrating an acquired company, which could
adversely affect the acquired companys performance or
prevent us from realizing anticipated synergies, cost savings
and operational efficiencies. Our existing businesses could also
be negatively impacted by acquisitions. Expanding our lines of
business, expanding our geographic reach and entering into joint
ventures or partnerships also involve operational, strategic and
financial risks, including retaining qualified management and
implementing satisfactory budgetary, financial and operational
controls. Our failure to manage successfully these risks may
adversely affect our financial condition, results of operations
or business, or we may not realize any of the intended benefits.
35
We may
not achieve a competitive worldwide effective corporate tax rate
as a result of our being a Swiss company.
We believe that the Redomestication will allow us to maintain a
competitive worldwide effective corporate tax rate. However, we
cannot give any assurance as to what our effective tax rate will
be as a result of our becoming a Swiss company because of, among
other things, uncertainty regarding the tax policies of the
jurisdictions where we operate. Our actual effective tax rate
may vary from our expectations and that variance may be
material. Additionally, the tax laws of Switzerland and other
jurisdictions could change in the future, and such changes could
cause a material change in our effective tax rate.
As a
result of the higher par value of our common shares, as a Swiss
company we will have less flexibility than we did when we were a
Bermuda company with respect to certain aspects of capital
management.
The par value of our common shares is CHF 15.00 per share. Under
Swiss law, we may not issue shares below par value. In the event
we need to raise common equity capital at a time when the
trading price of our shares is below the par value of such
shares, we will be unable to do so. We currently issue stock
options under our Third Amended and Restated 2001 Employee Stock
Option Plan with an exercise price equal to the closing price of
our common shares on the date of issuance. We will not be able
to issue stock options with an exercise price below the par
value, which may limit the flexibility of our compensation
arrangements. As a consequence we would have to consider
reducing the par value of our common shares, which in turn would
reduce our ability to make tax-free distributions to our
shareholders. We would also need to obtain approval of our
shareholders to decrease the par value of our common shares,
which would require us to file a proxy statement with the SEC
and convene a meeting of shareholders. This would delay any
capital raising plans and there is no assurance that we would be
able to obtain such shareholder approval. See Risks
Related to Taxation We may not be able to make
distributions or repurchase shares without subjecting you to
Swiss withholding tax.
As a
result of increased shareholder approval powers, as a Swiss
company we will have less flexibility than we did when we were a
Bermuda company with respect to certain aspects of capital
management.
Under Bermuda law, our directors were authorized to issue,
without shareholder approval, any common shares authorized in
Allied World Bermudas memorandum of association that were
not issued or reserved. Bermuda law also provided the Allied
World Bermudas Board of Directors with substantial
flexibility in establishing the terms of preferred shares. In
addition, Allied World Bermudas Board of Directors had the
right, subject to statutory limitations, to declare and pay
dividends on that companys common shares without a
shareholder vote. Swiss law affords shareholders more powers and
allows our shareholders to authorize share and participation
capital that can be issued by the Board of Directors without
shareholder approval. Under Swiss law, this authorization is
limited to 50% of a companys existing registered share and
participation capital and must be renewed by the shareholders
every two years. Under our Articles of Association, this
authorization is further limited to 20% of our existing
registered share and participation capital. Additionally,
subject to specified exceptions described in our Articles of
Association, Swiss law grants preemptive rights to existing
shareholders to subscribe for new issuances of shares and other
securities. Swiss law also does not provide as much flexibility
in the various terms that can attach to different classes of
shares. For example, while the Board of Directors of Allied
World Bermuda could have authorized the issuance of preferred
stock without shareholder approval, we will not be able to issue
preferred stock without the approval of a majority of the votes
cast at a shareholder meeting. Swiss law also reserves for
approval by shareholders many corporate actions over which
Allied World Bermudas Board of Directors had authority.
For example, dividends must be approved by shareholders. While
we do not believe that the differences between Bermuda law and
Swiss law relating to our capital management will have a
material adverse effect on us, we cannot assure you that
situations will not arise where such flexibility would have
provided substantial benefits to us and our shareholders.
The
anticipated benefits of moving our corporate headquarters to
Switzerland may not be realized, and difficulties in connection
with moving corporate headquarters could have an adverse effect
on us.
We have relocated our corporate headquarters from Pembroke,
Bermuda to Switzerland. We expect that some of our executive
officers and other key decision makers will relocate to
Switzerland. We may face significant
36
challenges in relocating our principal executive office to a
different country, including difficulties in retaining and
attracting officers, key personnel and other employees and
challenges in maintaining corporate headquarters in a country
different from the country where other employees, including
other executive officers and corporate support staff, are
located. Employees may be uncertain about their future roles
within our organization as a result of the Redomestication.
Management may also be required to devote substantial time to
relocating our corporate headquarters and related matters, which
could otherwise be devoted to focusing on ongoing business
operations and other initiatives and opportunities. Any such
difficulties could have an adverse effect on our business,
results of operations or financial condition.
A
complaint filed against our Bermuda insurance subsidiary could,
if adversely determined or resolved, subject us to a material
loss.
On April 4, 2006, a complaint was filed in the
U.S. District Court for the Northern District of Georgia
(Atlanta Division) by a group of several corporations and
certain of their related entities in an action entitled New
Cingular Wireless Headquarters, LLC et al, as plaintiffs,
against certain defendants, including Marsh & McLennan
Companies, Inc., Marsh Inc. and Aon Corporation, in their
capacities as insurance brokers, and 78 insurers, including our
insurance subsidiary in Bermuda, Allied World Assurance Company,
Ltd.
The action generally relates to broker defendants
placement of insurance contracts for plaintiffs with the 78
insurer defendants. Plaintiffs maintain that the defendants used
a variety of illegal schemes and practices designed to, among
other things, allocate customers, rig bids for insurance
products and raise the prices of insurance products paid by the
plaintiffs. In addition, plaintiffs allege that the broker
defendants steered policyholders business to preferred
insurer defendants. Plaintiffs claim that as a result of these
practices, policyholders either paid more for insurance products
or received less beneficial terms than the competitive market
would have produced. The eight counts in the complaint allege,
among other things, (i) unreasonable restraints of trade
and conspiracy in violation of the Sherman Act,
(ii) violations of the Racketeer Influenced and Corrupt
Organizations Act, or RICO, (iii) that broker defendants
breached their fiduciary duties to plaintiffs, (iv) that
insurer defendants participated in and induced this alleged
breach of fiduciary duty, (v) unjust enrichment,
(vi) common law fraud by broker defendants and
(vii) statutory and consumer fraud under the laws of
certain U.S. states. Plaintiffs seek equitable and legal
remedies, including injunctive relief, unquantified
consequential and punitive damages, and treble damages under the
Sherman Act and RICO. On October 16, 2006, the Judicial
Panel on Multidistrict Litigation ordered that the litigation be
transferred to the U.S. District Court for the District of
New Jersey for inclusion in the coordinated or consolidated
pretrial proceedings occurring in that court. The Court stayed
proceedings in the litigation pending a decision by the Third
Circuit Court of Appeals on an appeal of the courts
decisions granting motions to dismiss in a related putative
class action. Because of the stay, neither Allied World
Assurance Company, Ltd nor any of the other defendants have
responded to the complaint and written discovery that had begun
has not been completed. On August 16, 2010, the Third
Circuit issued its ruling in the related action, affirming the
dismissal in large part, vacating it in part and remanding that
case for further proceedings. On October 5, 2010, the court
decided to extend the current stay until after it decides the
renewed motions to dismiss the class action complaint that have
been filed. At this point, it is not possible to predict the
outcome of the litigation; the company does not, however,
currently believe that the outcome will have a material adverse
effect on the companys operations or financial position.
We may
become subject to additional Swiss regulation.
Under so-called group supervision, FINMA has the
right to supervise us on a group-wide basis. On
December 11, 2009, we received non-binding written
confirmation from FINMA that it will not subject us to group
supervision based primarily on the fact that most of our senior
management will not reside in Switzerland. Factors which can
cause FINMA to subject us to group supervision include the
location of our top management and corresponding requests by
foreign regulators. We cannot assure you that our future
business needs may not require us to have a greater management
presence in Switzerland or that FINMA will not otherwise
determine to exercise group supervision over us. If subjected to
group supervision, we may incur additional costs and
administrative obligations. These additional costs and
administrative obligations may have a substantial impact on our
organizational and operational flexibility.
37
Risks
Related to the Insurance and Reinsurance Business
The
insurance and reinsurance business is historically cyclical and
we expect to experience periods with excess underwriting
capacity and unfavorable premium rates and policy terms and
conditions.
Historically, insurers and reinsurers have experienced
significant fluctuations in operating results due to
competition, frequency of occurrence or severity of catastrophic
events, levels of underwriting capacity, general economic
conditions and other factors. The supply of insurance and
reinsurance is related to prevailing prices, the level of
insured losses and the level of industry surplus which, in turn,
may fluctuate in response to changes in rates of return on
investments being earned in the insurance and reinsurance
industry. The occurrence, or non-occurrence, of catastrophic
events, the frequency and severity of which are unpredictable,
affects both industry results and consequently prevailing market
prices for certain of our products. As a result of these
factors, the insurance and reinsurance business historically has
been a cyclical industry characterized by periods of intense
competition on price and policy terms due to excessive
underwriting capacity as well as periods when shortages of
capacity permit favorable premium rates and policy terms and
conditions. Increases in the supply of insurance and reinsurance
may have adverse consequences for us, including fewer policies
and contracts written, lower premium rates, increased expenses
for customer acquisition and retention and less favorable policy
terms and conditions.
Increased
competition in the insurance and reinsurance markets in which we
operate could adversely impact our operating
margins.
The insurance and reinsurance industry are highly competitive.
We compete with major U.S. and international insurers and
reinsurers. Many of our competitors have greater financial,
marketing and management resources. We also compete with new
companies that continue to be formed to enter the insurance and
reinsurance markets.
In addition, risk-linked securities and derivative and other
non-traditional risk transfer mechanisms and vehicles are being
developed and offered by other parties, including entities other
than insurance and reinsurance companies. The availability of
these non-traditional products could reduce the demand for
traditional insurance and reinsurance. A number of new, proposed
or potential industry or legislative developments could further
increase competition in our industry.
New competition from these developments could result in fewer
contracts written, lower premium rates, increased expenses for
customer acquisition and retention and less favorable policy
terms and conditions, which could have a material adverse effect
on our growth, financial condition or results of operations.
The
effects of emerging claims and coverage issues on our business
are uncertain.
As industry practices and legal, judicial, social and other
conditions change, unexpected and unintended issues related to
claims and coverage may emerge. These issues may adversely
affect our business by either extending coverage beyond our
underwriting intent or by increasing the number or size of
claims. In some instances, these changes may not become apparent
until some time after we have issued insurance or reinsurance
contracts that are affected by the changes. As a result, the
full extent of liability under our insurance and reinsurance
contracts may not be known for many years after a contract is
issued. Examples of emerging claims and coverage issues include:
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larger defense costs, settlements and jury awards in cases
involving professionals and corporate directors and officers
covered by professional liability and directors and officers
liability insurance; and
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a trend of plaintiffs targeting property and casualty insurers
in class action litigation related to claims handling, insurance
sales practices and other practices related to the conduct of
our business.
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Risks
Related to Laws and Regulations Applicable to Us
Compliance
by our insurance subsidiaries with the legal and regulatory
requirements to which they are subject is expensive. Any failure
to comply could have a material adverse effect on our
business.
Our insurance subsidiaries are required to comply with a wide
variety of laws and regulations applicable to insurance or
reinsurance companies, both in the jurisdictions in which they
are organized and where they sell their insurance and
reinsurance products. The insurance and regulatory environment,
in particular for offshore insurance
38
and reinsurance companies, has become subject to increased
scrutiny in many jurisdictions, including the United States,
various states within the United States and the United Kingdom.
In the past, there have been Congressional and other initiatives
in the United States regarding increased supervision and
regulation of the insurance industry. It is not possible to
predict the future impact of changes in laws and regulations on
our operations. The cost of complying with any new legal
requirements affecting our subsidiaries could have a material
adverse effect on our business.
In addition, our subsidiaries may not always be able to obtain
or maintain necessary licenses, permits, authorizations or
accreditations. They also may not be able to fully comply with,
or to obtain appropriate exemptions from, the laws and
regulations applicable to them. Any failure to comply with
applicable law or to obtain appropriate exemptions could result
in restrictions on either the ability of the company in
question, as well as potentially its affiliates, to do business
in one or more of the jurisdictions in which they operate or on
brokers on which we rely to produce business for us. In
addition, any such failure to comply with applicable laws or to
obtain appropriate exemptions could result in the imposition of
fines or other sanctions. Any of these sanctions could have a
material adverse effect on our business.
Our Bermuda insurance subsidiary, Allied World Assurance
Company, Ltd, is registered as a Class 4 Bermuda insurance
and reinsurance company and is subject to regulation and
supervision in Bermuda. The applicable Bermudian statutes and
regulations generally are designed to protect insureds and
ceding insurance companies rather than shareholders or
noteholders. Among other things, those statutes and regulations:
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require Allied World Assurance Company, Ltd to maintain minimum
levels of capital and surplus,
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impose liquidity requirements which restrict the amount and type
of investments it may hold,
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prescribe solvency standards that it must meet, and
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restrict payments of dividends and reductions of capital and
provide for the performance of periodic examinations of Allied
World Assurance Company, Ltd and its financial condition.
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These statutes and regulations may, in effect, restrict the
ability of Allied World Assurance Company, Ltd to write new
business or distribute funds. Although it conducts its
operations from Bermuda, Allied World Assurance Company, Ltd is
not authorized to directly underwrite local risks in Bermuda.
Allied World Assurance Company, Ltd also operates branch offices
in Hong Kong and Singapore, which offices are regulated by the
Office of the Insurance Commissioner in Hong Kong and the
Monetary Authority of Singapore, respectively.
Our U.S. insurance and reinsurance subsidiaries, Allied
World Assurance Company (U.S.) Inc. and Darwin National
Assurance Company, each a Delaware domiciled subsidiary, Allied
World National Assurance Company and Allied World Reinsurance
Company, each a New Hampshire domiciled subsidiary, and Darwin
Select Insurance Company and Vantapro Specialty Insurance
Company, each an Arkansas domiciled subsidiary, are subject to
the statutes and regulations of their relevant state of domicile
as well as any other state in the United States where they
conduct business. In the states where the companies are
admitted, the companies must comply with all insurance laws and
regulations, including insurance rate and form requirements.
Insurance laws and regulations may vary significantly from state
to state. In those states where the companies act as surplus
lines carriers, the states regulation focuses mainly on
the companys solvency.
Allied World Assurance Company (Europe) Limited, an Irish
domiciled insurer, operates within the EU non-life insurance
legal and regulatory framework as established under the Third
Non-Life Directive of the European Union, and operates a branch
in London, England. Allied World Assurance Company (Europe)
Limited is required to operate in accordance with the provisions
of the Irish Insurance Acts
1909-2000,
the Central Bank Acts 1942 to 2010, all statutory instruments
made thereunder, all statutory instruments relating to insurance
made under the European Communities Acts 1972 to 2009 and the
requirements of the CBI.
Allied World Assurance Company (Reinsurance) Limited, an Irish
domiciled reinsurer, is regulated by the CBI pursuant to the
Central Bank Acts 1942 to 2010 and the provisions of the
European Communities (Reinsurance) Regulations 2006 (which
transposed the E.U. Reinsurance Directive into Irish law) and
operates branches in
39
London, England and Zug, Switzerland. Pursuant to the provisions
of these regulations, reinsurance undertakings may, subject to
the satisfaction of certain formalities, carry on reinsurance
business in other EU member states either directly from the home
member state (on a freedom to provide services basis) or through
local branches (by way of permanent establishment).
Our
Bermuda operating company could become subject to regulation in
the United States.
Allied World Assurance Company, Ltd, our Bermuda operating
company is not admitted as an insurer, nor accredited as a
reinsurer, in any jurisdiction in the United States. For the
year ended December 31, 2010, more than 78% of the gross
premiums written by Allied World Assurance Company, Ltd,
however, are derived from insurance or reinsurance contracts
entered into with entities domiciled in the United States. The
insurance laws of each state in the United States regulate the
sale of insurance and reinsurance within the states
jurisdiction by foreign insurers. Allied World Assurance
Company, Ltd conducts its business through its offices in
Bermuda and does not maintain an office, and its personnel do
not solicit insurance business, resolve claims or conduct other
insurance business, in the United States. While Allied World
Assurance Company, Ltd does not believe it is in violation of
insurance laws of any jurisdiction in the United States, we
cannot be certain that inquiries or challenges to our insurance
and reinsurance activities will not be raised in the future. It
is possible that, if Allied World Assurance Company, Ltd were to
become subject to any laws of this type at any time in the
future, we would not be in compliance with the requirements of
those laws.
Our
holding company structure and regulatory and other constraints
affect our ability to pay dividends and make other
payments.
Allied World Assurance Company Holdings, AG is a holding
company, and as such has no substantial operations of its own.
It does not have any significant assets other than its ownership
of the shares of its direct and indirect subsidiaries. Dividends
and other permitted distributions from subsidiaries are expected
to be the sole source of funds for Allied World Assurance
Company Holdings, AG to meet any ongoing cash requirements and
to pay any dividends to shareholders.
Swiss
Law
Under Swiss law, dividends may be paid out only if we have
sufficient distributable profits from previous fiscal years or
if we have freely distributable reserves, each as will be
presented on Holdings audited statutory financial
statements prepared in accordance with Swiss law. Payments out
of the share and participation capital (in other words, the
aggregate par value of our share and participation capital) in
the form of dividends are not allowed; however, payments out of
share and participation capital may be made by way of a capital
reduction to achieve a similar result as the payment of
dividends. The affirmative vote of shareholders holding a
majority of the votes cast at a shareholder meeting must approve
reserve reclassifications and distributions of dividends. Our
Board of Directors may propose to shareholders that a dividend
be paid but cannot itself authorize the dividend. In addition,
our shareholders may propose dividends without any dividend
proposal by the Board of Directors. Under Swiss law, upon
satisfaction of all legal requirements (including shareholder
approval of a par value reduction as described in this
proposal), we will be required to submit an application to the
Swiss Commercial Register to register each applicable par value
reduction. Without effective registration of the applicable par
value reduction with the Swiss Commercial Register, we will not
be able to proceed with the payment of any installment of any
dividend. We cannot assure you that the Swiss Commercial
Register will approve the registration of any applicable par
value reduction.
Under Swiss law, if our general capital reserves amount to less
than 20% of the share and participation capital recorded in the
Swiss Commercial Register (i.e., 20% of the aggregate par value
of our capital), then at least 5% of our annual profit must be
retained as general reserves. Swiss law permits us to accrue
additional general reserves. In addition, we are required to
create a special reserve on Holdings audited statutory
financial statements in the amount of the purchase price of
voting shares and non-voting shares we or any of our
subsidiaries repurchases, which amount may not be used for
dividends.
40
Swiss companies generally must maintain separate audited
statutory financial statements for the purpose of, among other
things, determining the amounts available for the return of
capital to shareholders, including by way of a distribution of
dividends. Amounts available for the return of capital as
indicated on Holdings audited statutory financial
statements may be materially different from amounts reflected in
our consolidated U.S. GAAP financial statements. Our
auditor must confirm that a dividend proposal made to
shareholders complies with Swiss law and our Articles of
Association.
We are required under Swiss law to declare any dividends and
other capital distributions in Swiss francs. We intend to make
any dividend payments to holders of our common shares in
U.S. dollars. Continental Stock Transfer &
Trust Company, our transfer agent, will be responsible for
paying the U.S. dollars to registered holders of voting
shares and non-voting participation certificates, less amounts
subject to withholding for taxes. As a result, shareholders are
exposed to fluctuations in the U.S. dollar
Swiss franc exchange rate between the date used for purposes of
calculating the Swiss franc amount of any proposed dividend or
par value reduction and the relevant payment date.
Bermuda
Law
Bermuda law, including Bermuda insurance regulations and the
Companies Act, restricts the declaration and payment of
dividends and the making of distributions by our Bermuda
entities, unless specified requirements are met. Allied World
Assurance Company, Ltd is prohibited from paying dividends of
more than 25% of its total statutory capital and surplus (as
shown in its previous financial years statutory balance
sheet) without prior BMA approval. Allied World Assurance
Company, Ltd is also prohibited from declaring or paying
dividends without the approval of the BMA if Allied World
Assurance Company, Ltd failed to meet its minimum solvency
margin and minimum liquidity ratio on the last day of the
previous financial year.
Furthermore, in order to reduce its total statutory capital by
15% or more, Allied World Assurance Company, Ltd would require
the prior approval of the BMA. In addition, Bermuda corporate
law prohibits a company from declaring or paying a dividend if
there are reasonable grounds for believing that (i) the
company is, or would after the payment be, unable to pay its
liabilities as they become due; or (ii) the realizable
value of the companys assets would thereby be less than
the aggregate of its liabilities, its issued share capital and
its share premium accounts.
U.S. and
Irish Law
In addition, our U.S. and Irish insurance subsidiaries are
subject to significant regulatory restrictions limiting their
ability to declare and pay any dividends.
In general, a U.S. insurance company subsidiary may not pay
an extraordinary dividend or distribution until
30 days after the applicable insurance regulator has
received notice of the intended payment and has not objected to,
or has approved, the payment within the
30-day
period. In general, an extraordinary dividend or
distribution is defined by these laws and regulations as a
dividend or distribution that, together with other dividends and
distributions made within the preceding 12 months, exceeds
the greater (or, in some jurisdictions, the lesser) of:
(a) 10% of the insurers statutory surplus as of the
immediately prior year end; or (b) or the statutory net
income during the prior calendar year. The laws and regulations
of some of these U.S. jurisdictions also prohibit an
insurer from declaring or paying a dividend except out of its
earned surplus. For example, payments of dividends by
U.S. insurance companies are subject to restrictions on
statutory surplus pursuant to state law. In addition, insurance
regulators may prohibit the payment of ordinary dividends or
other payments by our U.S. insurance subsidiaries (such as
a payment under a tax sharing agreement or for employee or other
services) if they determine that such payment could be adverse
to such subsidiaries policyholders.
Without the consent of the CBI, Allied World Assurance Company
(Europe) Limited and Allied World Assurance Company
(Reinsurance) Limited are not permitted to reduce the level of
their capital, may not make any dividend payments, may not make
inter-company loans and must maintain a minimum solvency margin.
These rules and regulations may have the effect of restricting
the ability of these companies to declare and pay dividends.
In addition, we have insurance subsidiaries that are the parent
company for other insurance subsidiaries, and dividends and
other distributions are subject to multiple layers of the
regulations discussed above as funds are
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pushed up to our ultimate parent company. The inability of any
of our insurance subsidiaries to pay dividends in an amount
sufficient to enable Allied World Assurance Company Holdings, AG
to meet its cash requirements at the holding company level could
have a material adverse effect on our business, our ability to
transfer capital from one subsidiary to another and our ability
to declare and pay dividends to our shareholders. Furthermore,
Allied World Bermuda has senior notes outstanding. The inability
of any of our insurance subsidiaries to pay dividends in an
amount sufficient to enable Allied World Bermuda to make
payments on the outstanding senior notes could have a material
adverse effect on our business.
In
2010, the U.S. Congress enacted healthcare reform legislation
that could have a material impact on our business.
Our U.S. insurance segment and our international insurance
segment derive substantial revenues from healthcare liability
underwriting in the United States, that is, providing insurance
to individuals and institutions that participate in the
U.S. healthcare delivery infrastructure.
U.S. healthcare legislation in 2010 will effect
far-reaching
changes in the healthcare delivery system and the healthcare
cost reimbursement structure in the United States and could
negatively impact our healthcare liability business.
Additionally, future healthcare proposals could include tort
reform provisions under which plaintiffs would be restricted in
their ability to bring suit against healthcare providers, which
could negatively impact the demand for our healthcare liability
products. While the impact of this healthcare legislation or
future healthcare proposals on our business is difficult to
predict, any material changes in how healthcare providers insure
their malpractice liability risks could have a material adverse
effect on our results of operations.
In
2010, the U.S. Congress enacted the Dodd Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act),
which could have an impact on our business
On July 21, 2010, President Obama signed into law the
Dodd-Frank Act which effects sweeping changes to financial
services regulation in the United States. The Dodd-Frank Act
establishes the Financial Services Oversight Council
(FSOC), which is authorized to recommend that
certain systemically significant non-bank financial companies,
including insurance companies, be regulated by the Board of
Governors of the Federal Reserve. The Dodd-Frank Act also
establishes a Federal Insurance Office (FIO) and in
limited instances authorizes the federal preemption of certain
state insurance laws. The FSOC and FIO are authorized to study,
monitor and report to Congress on the U.S. insurance
industry and the significance of global reinsurance to the
U.S. insurance market. The potential impact of the
Dodd-Frank Act on the U.S. insurance business is not clear,
however, our business could be affected by changes to the
U.S. system of insurance regulation or our designation or
the designation of insurers or reinsurers with which we do
business as systemically significant non-bank financial
companies.
Other
legislative, regulatory and industry initiatives could adversely
affect our business.
The insurance and reinsurance regulatory framework is subject to
heavy scrutiny by U.S. federal and individual state
governments as well as an increasing number of international
authorities. Government regulators are generally concerned with
the protection of policyholders to the exclusion of other
constituencies, including shareholders. Governmental authorities
in the United States and worldwide seem increasingly interested
in the potential risks posed by the insurance industry as a
whole, and to commercial and financial systems in general. While
we do not believe these inquiries have identified meaningful,
new risks posed by the insurance and reinsurance industry, and
while we cannot predict the exact nature, timing or scope of
possible governmental initiatives, there may be increased
regulatory intervention in our industry in the future. For
example, the U.S. federal government has increased its
scrutiny of the insurance regulatory framework in recent years,
and some state legislators have considered or enacted laws that
will alter and likely increase state regulation of insurance and
reinsurance companies and holding companies. Moreover, the NAIC,
which is an association of the insurance commissioners of all
50 states and the District of Columbia and state insurance
regulators, regularly reexamine existing laws and regulations.
For example, we could be adversely affected by proposals to:
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provide insurance and reinsurance capacity in markets and to
consumers that we target;
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require our participation in industry pools and guaranty
associations;
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expand the scope of coverage under existing policies;
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increasingly mandate the terms of insurance and reinsurance
policies;
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establish a new federal insurance regulator or financial
industry systemic risk regulator;
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revise laws and regulations under which we operate, including a
potential change to U.S. tax laws to disallow or limit the
current tax deduction for reinsurance premiums paid by our
U.S. subsidiaries to our Bermuda insurance subsidiary for
reinsurance protections it provides to our
U.S. subsidiaries; or
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disproportionately benefit the companies of one country over
those of another.
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With respect to international measures, an EU directive
concerning the capital adequacy, risk management and regulatory
reporting for insurers and reinsurers (Solvency II)
which was adopted by the European Parliament in April 2009, may
affect our insurance businesses. Implementation of
Solvency II by EU member states is anticipated at the
beginning of 2013. Implementing those measures necessary for
compliance with the requirements of Solvency II may require
us to utilize a significant amount of resources to ensure
compliance. In addition, the capital and solvency margin
requirements of Solvency II may lead to either an increase
or decrease of the capital required by our EU domiciled insurers
in order that they comply with Solvency II. Solvency II
provides for the supervision of insurers and reinsurers on both
a solo (entity level) and group basis. In respect of our non-EU
subsidiaries engaging in EU insurance or reinsurance business,
should the regulatory regime in which they are operating not be
deemed equivalent to that established within the EU pursuant to
Solvency II, additional capital requirements may be imposed in
order that such companies may continue to insure or reinsure EU
domiciled risk/cedents.
We are unable to predict the future impact on our operations of
changes in the laws and regulations to which we are or may
become subject. Moreover, our exposure to potential regulatory
initiatives could be heightened by the fact that our principal
insurance subsidiary is domiciled in, and operates exclusively
from, Bermuda. For example, Bermuda, a small jurisdiction, may
be disadvantaged in participating in global or cross-border
regulatory matters as compared with larger jurisdictions such as
the United States or the leading EU countries. In addition,
Bermuda, which is currently an overseas territory of the United
Kingdom, may consider changes to its relationship with the
United Kingdom in the future. These changes could adversely
affect Bermudas position with respect to its regulatory
initiatives, which could adversely impact us commercially.
Our
business could be adversely affected by Bermuda employment
restrictions.
Under Bermuda law, non-Bermudians (other than spouses of
Bermudians, holders of a permanent residents certificate
and holders of a working residents certificate) may not
engage in any gainful occupation in Bermuda without an
appropriate governmental work permit. Work permits may be
granted or extended by the Bermuda government if it is shown
that, after proper public advertisement in most cases, no
Bermudian (or spouse of a Bermudian, holder of a permanent
residents certificate or holder of a working
residents certificate) is available who meets the minimum
standard requirements for the advertised position. In 2001, the
Bermuda government announced a new immigration policy limiting
the total duration of work permits, including renewals, to six
to nine years, with specified exemptions for key employees. In
March 2004, the Bermuda government announced an amendment to
this policy which expanded the categories of occupations
recognized by the government as key and with respect
to which businesses can apply to be exempt from the
six-to-nine-year
limitations. The categories include senior executives, managers
with global responsibility, senior financial posts, certain
legal professionals and senior insurance professionals,
experienced/specialized brokers, actuaries, specialist
investment
traders/analysts
and senior information technology engineers and managers. On
occasion, we have experienced delays in obtaining work permits
from the Bermuda government for our Bermuda-based professional
employees who require them. It is possible that the Bermuda
government could deny work permits for our employees in the
future, which could have a material adverse effect on our
business.
43
Risks
Related to Ownership of Our Common Shares
Future
sales of our common shares may adversely affect the market
price.
As of February 21, 2011, we had 38,020,802 common shares
outstanding. Up to an additional 3,209,703 common shares may be
issuable upon the vesting and exercise of outstanding stock
options, restricted stock units (RSUs) and
performance-based equity awards. We have filed a registration
statement on
Form S-8
under the Securities Act of 1933, as amended (the
Securities Act) to register common shares issued or
reserved for issuance under the Allied World Assurance Company
Holdings, AG Third Amended and Restated 2001 Employee Stock
Option Plan, the Allied World Assurance Company Holdings, AG
Third Amended and Restated 2004 Stock Incentive Plan, the Allied
World Assurance Company Holdings, AG Third Amended and Restated
Long-Term Incentive Plan (the LTIP) and the Allied
World Assurance Company Holdings, AG Amended and Restated 2008
Employee Share Purchase Plan. Subject to the exercise of issued
and outstanding stock options, shares registered under the
registration statement on
Form S-8
will be available for sale to the public. We cannot predict what
effect, if any, future sales of our common shares, or the
availability of common shares for future sale, will have on the
market price of our common shares. Sales of substantial amounts
of our common shares in the public market, or the perception
that sales of this type could occur, could depress the market
price of our common shares and may make it more difficult for
you to sell your common shares at a time and price that you deem
appropriate.
Our
Articles of Association contain restrictions on voting,
ownership and transfers of our common shares.
Our Articles of Association generally provide that shareholders
have one vote for each common share held by them and are
entitled to vote at all meetings of shareholders. However, the
voting rights exercisable by a shareholder may be limited so
that certain persons or groups are not deemed to hold 10% or
more of the voting power conferred by our common shares.
Moreover, these provisions could have the effect of reducing the
voting power of some shareholders who would not otherwise be
subject to the limitation by virtue of their direct share
ownership. Our Board of Directors may refuse to register holders
of shares as shareholders with voting rights based on certain
grounds, including if the holder would, directly or indirectly,
formally, constructively or beneficially own (as described in
Articles 8 and 14 of our Articles of Association) or
otherwise control voting rights with respect to 10% or more of
our registered share capital recorded in the Swiss Commercial
Register. In addition, our Board of Directors shall reject entry
of holders of voting shares as shareholders with voting rights
in the share register or shall decide on their deregistration
when the acquirer or shareholder upon request does not expressly
state that it has acquired or holds the voting shares for its
own account and benefit. Furthermore, our Board of Directors may
cancel, with retroactive application, the registration of a
shareholder with voting rights if the initial registration was
on the basis of false information in the shareholders
application. Shareholders registered without voting rights may
not participate in or vote at our shareholders meetings, but
will be entitled to dividends, preemptive rights and liquidation
proceeds. Only shareholders that are registered as shareholders
with voting rights on the relevant record date are permitted to
participate in and vote at a shareholders meeting.
Anti-takeover
provisions in our Articles of Association could impede an
attempt to replace or remove our directors, which could diminish
the value of our common shares.
Our Articles of Association contain provisions that may entrench
directors and make it more difficult for shareholders to replace
directors even if the shareholders consider it beneficial to do
so. In addition, these provisions could delay or prevent a
change of control that a shareholder might consider favorable.
For example, these provisions may prevent a shareholder from
receiving the benefit from any premium over the market price of
our shares offered by a bidder in a potential takeover. Even in
the absence of an attempt to effect a change in management or a
takeover attempt, these provisions may adversely affect the
prevailing market price of our common shares if they are viewed
as discouraging changes in management and takeover attempts in
the future.
For example, the following provisions in our Articles of
Association could have such an effect:
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the election of our directors is staggered, meaning that members
of only one of three classes of our directors are elected each
year, thus limiting a shareholders ability to replace
directors;
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shareholders whose shares represent 10% or more of our total
voting shares will be reduced to less than 10% of the total
voting power. Conversely, shareholders owning less than 10% of
the total voting power may gain increased voting power as a
result of these cutbacks;
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our directors may decline the registration of a shareholder as a
shareholder with voting rights in the share register if and to
the extent such shareholder owns or otherwise controls alone or
together with others 10% of our total voting rights or if such
shareholder refuses to confirm to us that it has acquired the
voting shares for its own account and benefit; and
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at any time until November 30, 2012, our Board of Directors
has the power to issue a number of voting shares up to 20% of
our share capital registered in the Swiss Commercial Register
and to limit or withdraw the preemptive rights of the existing
shareholders in various circumstances.
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As a
shareholder of our company, you may have greater difficulties in
protecting your interests than as a shareholder of a U.S.
corporation.
Swiss law differs in material respects from laws generally
applicable to U.S. corporations and their shareholders.
Taken together with the provisions of our Articles of
Association, some of these differences may result in your having
greater difficulties in protecting your interests as a
shareholder of our company than you would have as a shareholder
of a U.S. corporation. This affects, among other things,
the circumstances under which transactions involving an
interested director are voidable, whether an interested director
can be held accountable for any benefit realized in a
transaction with our company, what approvals are required for
business combinations by our company with a large shareholder or
a wholly-owned subsidiary, what rights you may have as a
shareholder to enforce specified provisions of Swiss corporate
law or our Articles of Association, the rights of shareholders
to bring class action and derivative lawsuits and the
circumstances under which we may indemnify our directors and
officers.
It may
be difficult to enforce service of process and enforcement of
judgments against us and our officers and
directors.
Holdings is incorporated pursuant to the laws of Switzerland. In
addition, certain of our directors and officers reside outside
the United States, and all or a substantial portion of our
assets and the assets of such persons are located in
jurisdictions outside the United States. As such, it may be
difficult or impossible to effect service of process within the
United States upon us or those persons or to recover against us
or them on judgments of U.S. courts, including judgments
predicated upon civil liability provisions of the
U.S. federal securities laws.
We have been advised by Swiss counsel, that there is doubt as to
whether the courts in Switzerland would enforce judgments of
U.S. courts obtained in actions against us or our directors
and officers, predicated upon the civil liability provisions of
the U.S. federal securities laws or original actions
brought in Switzerland against us or such persons predicated
solely upon U.S. federal securities laws. Further, we have
been advised by Swiss counsel that there is no treaty in effect
between the United States and Switzerland providing for the
enforcement of judgments of U.S. courts. Some remedies
available under the laws of U.S. jurisdictions, including
some remedies available under the U.S. federal securities
laws, may not be allowed in Swiss courts as contrary to that
jurisdictions public policy. Because judgments of
U.S. courts are not automatically enforceable in
Switzerland, it may be difficult for investors to recover
against us based upon such judgments.
There
are regulatory limitations on the ownership and transfer of our
common shares.
The BMA must approve all issuances and transfers of securities
of our Bermuda exempted companies. Before any shareholder
acquires 10% or more of the voting shares, either directly or
indirectly, of any of our U.S. insurance subsidiaries, that
shareholder must file an acquisition statement with and obtain
prior approval from the domiciliary insurance commissioner of
the respective company. Similar provisions apply to our
Lloyds corporate member. Any
45
company or individual that, together with its or his associates,
directly or indirectly acquires 10% or more of the shares in a
Lloyds corporate member or its parent company, or is
entitled to exercise or control the exercise of 10% or more of
the voting power in such Lloyds corporate member or its
parent company, would be considered to have acquired control for
the purposes of the relevant legislation, as would a person who
had significant influence over the management of such
Lloyds corporate member or its parent company by virtue of
his shareholding or voting power in either. In such a case, the
controlling entity would be required to provide notice to
Lloyds.
Risks
Related to Taxation
U.S.
taxation of our
non-U.S.
companies could materially adversely affect our financial
condition and results of operations.
We believe that our
non-U.S. companies,
including our Swiss, Bermuda and Irish companies, have operated
and will operate their respective businesses in a manner that
will not cause them to be subject to U.S. tax (other than
U.S. federal excise tax on insurance and reinsurance
premiums and withholding tax on specified investment income from
U.S. sources) on the basis that none of them are engaged in
a U.S. trade or business. However, there are no definitive
standards under current law as to those activities that
constitute a U.S. trade or business and the determination
of whether a
non-U.S. company
is engaged in a U.S. trade or business is inherently
factual. Therefore, we cannot assure you that the
U.S. Internal Revenue Service (the IRS) will
not contend that a
non-U.S. company
is engaged in a U.S. trade or business. If any of the
non-U.S. companies
are engaged in a U.S. trade or business and does not
qualify for benefits under the applicable income tax treaty,
such company may be subject to U.S. federal income taxation
at regular corporate rates on its premium income from
U.S. sources and investment income that is effectively
connected with its U.S. trade or business. In addition, a
U.S. federal branch profits tax at the rate of 30% may be
imposed on the earnings and profits attributable to such income.
All of the premium income from U.S. sources and a
significant portion of investment income of such company, as
computed under Section 842 of the Code, requiring that a
foreign company carrying on a U.S. insurance or reinsurance
business have a certain minimum amount of effectively connected
net investment income, determined in accordance with a formula
that depends, in part, on the amount of U.S. risks insured
or reinsured by such company, may be subject to
U.S. federal income and branch profits taxes.
If Allied World Assurance Company, Ltd, our Bermuda insurance
subsidiary, or any Bermuda insurance subsidiary we form or
acquire in the future is engaged in a U.S. trade or
business and qualifies for benefits under the United
States-Bermuda tax treaty, U.S. federal income taxation of
such subsidiary will depend on whether (i) it maintains a
U.S. permanent establishment and (ii) the relief from
taxation under the treaty generally applies to non-premium
income. We believe that our Bermuda insurance subsidiary has
operated and will continue to operate its business in a manner
that will not cause it to maintain a U.S. permanent
establishment. However, the determination of whether an
insurance company maintains a U.S. permanent establishment
is inherently factual. Therefore, we cannot assure you that the
IRS will not successfully assert that our Bermuda insurance
subsidiary maintains a U.S. permanent establishment. In
such case, our Bermuda insurance subsidiary will be subject to
U.S. federal income tax at regular corporate rates and
branch profit tax at the rate of 30% with respect to its income
attributable to the permanent establishment. Furthermore,
although the provisions of the treaty clearly apply to premium
income, it is uncertain whether they generally apply to other
income of a Bermuda insurance company. Therefore, if a Bermuda
insurance subsidiary of our company qualifies for benefits under
the treaty and does not maintain a U.S. permanent
establishment but is engaged in a U.S. trade or business,
and the treaty is interpreted not to apply to income other than
premium income, such subsidiary will be subject to
U.S. federal income and branch profits taxes on its
investment and other non-premium income as described in the
preceding paragraph. In addition, a Bermuda subsidiary will
qualify for benefits under the treaty only if more than 50% of
its shares are beneficially owned, directly or indirectly, by
individuals who are Bermuda residents or U.S. citizens or
residents. Our Bermuda subsidiaries may not be able to
continually satisfy such beneficial ownership test or be able to
establish it to the satisfaction of the IRS.
If any of our Swiss or Irish companies are engaged in a
U.S. trade or business and qualify for benefits under the
relevant income tax treaty with the United States,
U.S. federal income taxation of such company will depend on
whether it maintains a U.S. permanent establishment. We
believe that each such company has operated and will
46
continue to operate its business in a manner that will not cause
it to maintain a U.S. permanent establishment. However, the
determination of whether a
non-U.S. company
maintains a U.S. permanent establishment is inherently
factual. Therefore, we cannot assure you that the IRS will not
successfully assert that any of such companies maintains a
U.S. permanent establishment. In such case, the company
will be subject to U.S. federal income tax at regular
corporate rates and branch profits tax at the rate of 5% with
respect to its income attributable to the permanent
establishment.
U.S. federal income tax, if imposed, will be based on
effectively connected or attributable income of a
non-U.S. company
computed in a manner generally analogous to that applied to the
income of a U.S. corporation, except that all deductions
and credits claimed by a
non-U.S. company
in a taxable year can be disallowed if the company does not file
a U.S. federal income tax return for such year. Penalties
may be assessed for failure to file such return. None of our
non-U.S. companies
filed U.S. federal income tax returns for the 2002 and 2001
taxable years. However, we have filed protective
U.S. federal income tax returns on a timely basis for each
non-U.S. company
for subsequent years in order to preserve our right to claim tax
deductions and credits in such years if any of such companies is
determined to be subject to U.S. federal income tax.
If any of our
non-U.S. companies
is subject to such U.S. federal taxation, our financial
condition and results of operations could be materially
adversely affected.
Our
U.S. subsidiaries may be subject to additional U.S. taxes in
connection with our interaffiliate arrangements.
Our U.S. subsidiaries reinsure a significant portion of
their insurance policies with Allied World Assurance Company,
Ltd. While we believe that the terms of these reinsurance
arrangements are arms length, we cannot assure you that
the IRS will not successfully assert that the payments made by
the U.S. subsidiaries with respect to such arrangements
exceed arms length amounts. In such case, our
U.S. subsidiaries will be treated as realizing additional
income that may be subject to additional U.S. income tax,
possibly with interest and penalties. Such excess amount may
also be deemed to have been distributed as dividends to the
indirect parent of the U.S. subsidiaries, Allied World
Assurance Holdings (Ireland) Ltd, in which case this deemed
dividend will also be subject to a U.S. federal withholding
tax of 5%, assuming that the parent is eligible for benefits
under the United States-Ireland income tax treaty (or a
withholding tax of 30% if the parent is not so eligible). If any
of these U.S. taxes are imposed, our financial condition
and results of operations could be materially adversely
affected. In addition, if legislation is enacted in the
U.S. that limits or eliminates our ability to enter into
interaffiliate arrangements, our financial condition or results
of operations could be materially adversely affected.
We may
not be able to make distributions or repurchase shares without
subjecting you to Swiss withholding tax.
If we are not successful in our efforts to make distributions,
if any, through a reduction of par value or pay dividends out of
qualifying additional paid-in capital, then any dividends paid
by us will generally be subject to a Swiss federal withholding
tax at a rate of 35%. The withholding tax must be withheld from
the gross distribution and paid to the Swiss Federal Tax
Administration. A U.S. holder that qualifies for benefits
under the Convention between the United States of America and
the Swiss Confederation for the Avoidance of Double Taxation
with Respect to Taxes on Income may apply for a refund of the
tax withheld in excess of the 15% treaty rate (or in excess of
the 5% reduced treaty rate for qualifying corporate shareholders
with at least 10% participation in our voting shares, or for a
full refund in case of qualified pension funds). Payment of a
capital distribution in the form of a par value reduction is not
subject to Swiss withholding tax. However, there can be no
assurance that our shareholders will approve a reduction in par
value, that we will be able to meet the other legal requirements
for a reduction in par value, or that Swiss withholding rules
will not be changed in the future. In addition, over the long
term, the amount of par value available for us to use for par
value reductions will be limited. If we are unable to make a
distribution through a reduction in par value or, pay a dividend
out of qualifying additional paid-in capital, we may not be able
to make distributions without subjecting you to Swiss
withholding taxes.
Under present Swiss tax law, repurchases of our common shares
for the purposes of capital reduction are treated as a partial
liquidation subject to 35% Swiss withholding tax on the
difference between the par value and the
47
repurchase price. We may follow a share repurchase process for
future repurchases, if any, in which Swiss institutional
investors sell shares to us and are generally able to receive a
refund of the Swiss withholding tax. However, if we are unable
to use this process successfully, we may not be able to
repurchase our shares for the purposes of capital reduction
without subjecting you to Swiss withholding taxes.
You
may be subject to U.S. income taxation with respect to income of
our non-U.S.
companies and ordinary income characterization of gains on
disposition of our shares under the controlled foreign
corporation (CFC) rules.
Generally, each United States shareholder of a CFC
will be subject to (i) U.S. federal income taxation on
its ratable share of the CFCs subpart F income, even if
the earnings attributable to such income are not distributed,
provided that such United States shareholder holds
directly or through
non-U.S. entities
shares of the CFC; and (ii) potential ordinary income
characterization of gains from the sale or exchange of the
directly owned shares of the
non-U.S. corporation.
For these purposes, any U.S. person who owns directly,
through
non-U.S. entities,
or under applicable constructive ownership rules, 10% or more of
the total combined voting power of all classes of stock of any
non-U.S. company
will be considered to be a United States
shareholder. An insurance company is classified as a CFC
only if its United States shareholders own 25% or
more of the vote or value of its stock. Although our
non-U.S. companies
may be or become CFCs, for the following reasons we believe it
is unlikely that any U.S. person holding our shares
directly, or through
non-U.S. entities,
would be subject to tax as a United States
shareholder.
First, although certain of our principal U.S. shareholders
previously owned 10% or more of our common shares, no such
shareholder currently owns more than 10%. We will be classified
as a CFC only if United States shareholders own 25% or more of
our stock; one United States shareholder alone will not be
subject to tax on subpart F income unless that shareholder owns
25% or more of our stock or there is at least one other United
States shareholder that in combination with the first United
States shareholder owns 25% or more of our common stock. Second,
our Articles of Association provide that no individual or legal
entity may, directly or through Constructive Ownership (as
defined in Article 14 of our Articles of Association) or
otherwise control voting rights with respect to 10% or more of
our registered share capital recorded in the Swiss Commercial
Register and authorize our Board of Directors to refuse to
register holders of shares as shareholders with voting rights
under certain circumstances. We cannot assure you, however, that
the provisions of the Articles of Association referenced in this
paragraph will operate as intended or that we will be otherwise
successful in preventing a U.S. person from exceeding, or
being deemed to exceed, these voting limitations. Accordingly,
U.S. persons who hold our shares directly or through
non-U.S. entities
should consider the possible application of the CFC rules.
You
may be subject to U.S. income taxation under the related person
insurance income (RPII) rules.
Our
non-U.S. insurance
and reinsurance subsidiaries may currently insure and reinsure
and may continue to insure and reinsure directly or indirectly
certain of our U.S. shareholders and persons related to
such shareholders. We believe that U.S. persons that hold
our shares directly or through
non-U.S. entities
will not be subject to U.S. federal income taxation with
respect to the income realized in connection with such insurance
and reinsurance prior to distribution of earnings attributable
to such income either on the basis (i) that RPII,
determined on a gross basis, realized by each
non-U.S. insurance
and reinsurance subsidiary will be less than 20% of its gross
insurance income in each taxable year; or (ii) that at all
times during the year U.S. insureds hold less than 20% of
the combined voting power of all classes of our shares entitled
to vote and hold less than 20% of the total value of our shares.
However, the identity of all of our shareholders, as well as
some of the factors that determine the extent of RPII in any
period, may be beyond our knowledge or control. For example, we
may be considered to insure indirectly the risk of our
shareholder if an unrelated company that insured such risk in
the first instance reinsures such risk with us. Therefore, we
cannot assure you that we will be successful in keeping the RPII
realized by the
non-U.S. insurance
and reinsurance subsidiaries or the ownership of us by
U.S. insureds below the 20% limit in each taxable year.
Furthermore, even if we are successful in keeping the RPII or
the ownership of us by U.S. insureds below the 20% limit,
we cannot assure you that we will be able to establish that fact
to the satisfaction of the U.S. tax authorities. If we are
unable to establish that the RPII of any
non-U.S. insurance
or reinsurance subsidiary is less than 20% of that
subsidiarys gross insurance income in any taxable year,
and no other exception from the RPII rules applies, each
48
U.S. person who owns our shares, directly or through
non-U.S. entities,
on the last day of the taxable year will be generally required
to include in its income for U.S. federal income tax
purposes that persons ratable share of that
subsidiarys RPII for the taxable year, determined as if
that RPII were distributed proportionately to U.S. holders
at that date, regardless of whether that income was actually
distributed.
The RPII rules provide that if a holder who is a
U.S. person disposes of shares in a foreign insurance
corporation that has RPII (even if the amount of RPII is less
than 20% of the corporations gross insurance income and
the ownership of us by U.S. insureds is below 20%) and in
which U.S. persons own 25% or more of the shares, any gain
from the disposition will generally be treated as a dividend to
the extent of the holders share of the corporations
undistributed earnings and profits that were accumulated during
the period that the holder owned the shares (whether or not
those earnings and profits are attributable to RPII). In
addition, such a shareholder will be required to comply with
specified reporting requirements, regardless of the amount of
shares owned. These rules should not apply to dispositions of
our shares because Allied World Assurance Company Holdings, AG
is not itself directly engaged in the insurance business and
these rules appear to apply only in the case of shares of
corporations that are directly engaged in the insurance
business. We cannot assure you, however, that the IRS will
interpret these rules in this manner or that the proposed
regulations addressing the RPII rules will not be promulgated in
final form in a manner that would cause these rules to apply to
dispositions of our shares.
U.S.
tax-exempt entities may recognize unrelated business taxable
income (UBTI).
A U.S. tax-exempt entity holding our shares generally will
not be subject to U.S. federal income tax with respect to
dividends and gains on our shares, provided that such entity
does not purchase our shares with borrowed funds. However, if a
U.S. tax-exempt entity realizes income with respect to our
shares under the CFC or RPII rules, as discussed above, such
entity will be generally subject to U.S. federal income tax
with respect to such income as UBTI. Accordingly,
U.S. tax-exempt entities that are potential investors in
our shares should consider the possible application of the CFC
and RPII rules.
You
may be subject to additional U.S. federal income taxation with
respect to distributions on and gains on dispositions of our
shares under the passive foreign investment company
(PFIC) rules.
We believe that U.S. persons holding our shares should not
be subject to additional U.S. federal income taxation with
respect to distributions on and gains on dispositions of shares
under the PFIC rules. We expect that our insurance subsidiaries
will be predominantly engaged in, and derive their income from
the active conduct of, an insurance business and will not hold
reserves in excess of reasonable needs of their business, and
therefore qualify for the insurance exception from the PFIC
rules. However, the determination of the nature of such business
and the reasonableness of such reserves is inherently factual.
Furthermore, we cannot assure you, as to what positions the IRS
or a court might take in the future regarding the application of
the PFIC rules to us. Therefore, we cannot assure you that we
will not be considered to be a PFIC. If we are considered to be
a PFIC, U.S. persons holding our shares could be subject to
additional U.S. federal income taxation on distributions on
and gains on dispositions of shares. Accordingly, each
U.S. person who is considering an investment in our shares
should consult his or her tax advisor as to the effects of the
PFIC rules.
Application
of a published IRS Revenue Ruling with respect to our insurance
or reinsurance arrangements can materially adversely affect
us.
The IRS published Revenue Ruling
2005-40 (the
Ruling) addressing the requirement of adequate risk
distribution among insureds in order for a primary insurance
arrangement to constitute insurance for U.S. federal income
tax purposes. If the IRS successfully contends that our
insurance or reinsurance arrangements, including such
arrangements with affiliates of our principal shareholders, and
with our U.S. subsidiaries, do not provide for adequate
risk distribution under the principles set forth in the Ruling,
we could be subject to material adverse U.S. federal income
tax consequences.
49
Our
non-U.K. companies may be subject to U.K. tax, which may have a
material adverse effect on our results of
operations.
Two of our subsidiaries, Allied World Capital (Europe) Limited
and 2232 Services Limited, are incorporated in the United
Kingdom and, are therefore, subject to tax in the United
Kingdom. None of our other companies are incorporated in the
United Kingdom. Accordingly, none of our other companies should
be treated as being resident in the United Kingdom for
corporation tax purposes unless the central management and
control of any such company is exercised in the United Kingdom.
The concept of central management and control is indicative of
the highest level of control of a company, which is wholly a
question of fact. Each of our companies currently intend to
manage our affairs so that none of our other companies are
resident in the United Kingdom for tax purposes.
The rules governing the taxation of foreign companies operating
in the United Kingdom through a branch or agency were amended by
the Finance Act 2003. The current rules apply to the accounting
periods of non-U.K. resident companies which start on or after
January 1, 2003. Accordingly, a non-U.K. resident company
will only be subject to U.K. corporation tax if it carries on a
trade in the United Kingdom through a permanent establishment in
the United Kingdom. In that case, the company is, in broad
terms, taxable on the profits and gains attributable to the
permanent establishment in the United Kingdom. Broadly a company
will have a permanent establishment if it has a fixed place of
business in the United Kingdom through which the business of the
company is wholly or partly carried on or if an agent acting on
behalf of the company has and habitually exercises authority in
the United Kingdom to do business on behalf of the company.
Each of our companies, other than Allied World Assurance Company
(Reinsurance) Limited and Allied World Assurance Company
(Europe) Limited (which have established branches in the United
Kingdom), currently intend to operate in such a manner so that
none of our companies, other than Allied World Assurance Company
(Reinsurance) Limited and Allied World Assurance Company
(Europe) Limited, carry on a trade through a permanent
establishment in the United Kingdom.
If any of our U.S. subsidiaries were trading in the United
Kingdom through a branch or agency and the
U.S. subsidiaries were to qualify for benefits under the
applicable income tax treaty between the United Kingdom and the
United States, only those profits which were attributable to a
permanent establishment in the United Kingdom would be
subject to U.K. corporation tax.
If Allied World Assurance Holdings (Ireland) Ltd was trading in
the United Kingdom through a branch or agency and it was
entitled to the benefits of the tax treaty between Ireland and
the United Kingdom, it would only be subject to U.K. taxation on
its profits which were attributable to a permanent establishment
in the United Kingdom. The branches established in the United
Kingdom by Allied World Assurance Company (Reinsurance) Limited
and Allied World Assurance Company (Europe) Limited constitute a
permanent establishment of those companies and the profits
attributable to those permanent establishments are subject to
U.K. corporation tax.
The United Kingdom has no income tax treaty with Bermuda.
There are circumstances in which companies that are neither
resident in the United Kingdom nor entitled to the protection
afforded by a double tax treaty between the United Kingdom and
the jurisdiction in which they are resident may be exposed to
income tax in the United Kingdom (other than by deduction or
withholding) on income arising in the United Kingdom (including
the profits of a trade carried on there even if that trade is
not carried on through a branch agency or permanent
establishment), but each of our companies currently operates in
such a manner that none of our companies will fall within the
charge to income tax in the United Kingdom (other than by
deduction or withholding) in this respect.
If any of our
non-U.K.
companies were treated as being resident in the United Kingdom
for U.K. corporation tax purposes, or if any of our companies,
other than Allied World Assurance Company (Reinsurance) Limited
and Allied World Assurance Company (Europe) Limited, were to be
treated as carrying on a trade in the United Kingdom through a
branch agency or of having a permanent establishment in the
United Kingdom, our results of operations and your investment
could be materially adversely affected.
We may
be subject to Irish tax, which may have a material adverse
effect on our results of operations.
Companies resident in Ireland are generally subject to Irish
corporation tax on their worldwide income and capital gains.
None of our companies, other than our Irish companies and Allied
World Assurance Holdings
50
(Ireland) Ltd, which resides in Ireland, should be treated as
being resident in Ireland unless the central management and
control of any such company is exercised in Ireland. The concept
of central management and control is indicative of the highest
level of control of a company, and is wholly a question of fact.
Each of our companies, other than Allied World Assurance
Holdings (Ireland) Ltd and our Irish companies, currently intend
to operate in such a manner so that the central management and
control of each of our companies, other than Allied World
Assurance Holdings (Ireland) Ltd and our Irish companies, is
exercised outside of Ireland. Nevertheless, because central
management and control is a question of fact to be determined
based on a number of different factors, the Irish Revenue
Commissioners might contend successfully that the central
management and control of any of our companies, other than
Allied World Assurance Holdings (Ireland) Ltd or our Irish
companies, is exercised in Ireland. Should this occur, such
company will be subject to Irish corporation tax on their
worldwide income and capital gains.
The trading income of a company not resident in Ireland for
Irish tax purposes can also be subject to Irish corporation tax
if it carries on a trade through a branch or agency in Ireland.
Each of our companies currently intend to operate in such a
manner so that none of our companies carry on a trade through a
branch or agency in Ireland. Nevertheless, because neither case
law nor Irish legislation definitively defines the activities
that constitute trading in Ireland through a branch or agency,
the Irish Revenue Commissioners might contend successfully that
any of our companies, other than Allied World Assurance Holdings
(Ireland) Ltd and our Irish companies, is trading through a
branch or agency in Ireland. Should this occur, such companies
will be subject to Irish corporation tax on profits attributable
to that branch or agency.
If any of our companies, other than Allied World Assurance
Holdings (Ireland) Ltd and our Irish companies, were treated as
resident in Ireland for Irish corporation tax purposes, or as
carrying on a trade in Ireland through a branch or agency, our
results of operations and your investment could be materially
adversely affected.
If
corporate tax rates in Ireland increase, our business and
financial results could be adversely affected.
Trading income derived from the insurance and reinsurance
businesses carried on in Ireland by our Irish companies is
generally taxed in Ireland at a rate of 12.5%. Over the past
number of years, various EU Member States have, from time to
time, called for harmonization of corporate tax rates within the
EU. Ireland, along with other member states, has consistently
resisted any movement towards standardized corporate tax rates
in the EU. The Government of Ireland has also made clear its
commitment to retain the 12.5% rate of corporation tax until at
least the year 2025. Should, however, tax laws in Ireland change
so as to increase the general corporation tax rate in Ireland,
our results of operations could be materially adversely affected.
If
investments held by our Irish companies are determined not to be
integral to the insurance and reinsurance businesses carried on
by those companies, additional Irish tax could be imposed and
our business and financial results could be adversely
affected.
Based on administrative practice, taxable income derived from
investments made by our Irish companies is generally taxed in
Ireland at the rate of 12.5% on the grounds that such
investments either form part of the permanent capital required
by regulatory authorities, or are otherwise integral to the
insurance and reinsurance businesses carried on by those
companies. Our Irish companies intend to operate in such a
manner so that the level of investments held by such companies
does not exceed the amount that is integral to the insurance and
reinsurance businesses carried on by our Irish companies. If,
however, investment income earned by our Irish companies exceeds
these thresholds, or if the administrative practice of the Irish
Revenue Commissioners changes, Irish corporation tax could apply
to such investment income at a higher rate (currently 25%)
instead of the general 12.5% rate, and our results of operations
could be materially adversely affected.
We may
become subject to taxes in Bermuda after March 28, 2016,
which may have a material adverse effect on our results of
operations and our investment.
The Bermuda Minister of Finance, under the Exempted Undertakings
Tax Protection Act 1966 of Bermuda, has given our Bermuda
subsidiaries an assurance that if any legislation is enacted in
Bermuda that would impose tax computed on profits or income, or
computed on any capital asset, gain or appreciation, or any tax
in the nature of
51
estate duty or inheritance tax, then the imposition of any such
tax will not be applicable to such entities or their operations,
shares, debentures or other obligations until March 28,
2016. Given the limited duration of the Minister of
Finances assurance, we cannot be certain that we will not
be subject to any Bermuda tax after March 28, 2016.
|
|
Item 1B.
|
Unresolved
Staff Comments.
|
None.
52
GLOSSARY
OF SELECTED INSURANCE AND OTHER TERMS
|
|
|
Accident Year |
|
The year in which the event occurred that triggers a claim to
us. All years referred to are years ending December 31. |
|
Admitted insurer |
|
An insurer that is licensed or authorized to write insurance in
a particular state; to be distinguished from an insurer eligible
to write excess and surplus lines insurance on risks located
within a jurisdiction. |
|
Assumed reinsurance |
|
That portion of a risk that a reinsurer accepts from an insurer
in return for a stated premium. |
|
Attachment point |
|
The loss point of which an insurance or reinsurance policy
becomes operative and below which any losses are retained by
either the insured or other insurers or reinsurers, as the case
may be. |
|
Capacity |
|
The maximum percentage of surplus, or the dollar amount of
exposure, that an insurer or reinsurer is willing or able to
place at risk. Capacity may apply to a single risk, a program, a
line of business or an entire book of business. Capacity may be
constrained by legal restrictions, corporate restrictions or
indirect restrictions. |
|
Case reserves |
|
Loss reserves, established with respect to specific, individual
reported claims. |
|
Casualty lines |
|
Insurance that is primarily concerned with losses due to
injuries to persons and liability imposed on the insured for
such injury or for damage to the property of others. |
|
Catastrophe exposure or event |
|
A severe loss, typically involving multiple claimants. Common
perils include earthquakes, hurricanes, tsunamis, hailstorms,
severe winter weather, floods, fires, tornadoes, explosions and
other natural or man-made disasters. Catastrophe losses may also
arise from acts of war, acts of terrorism and political
instability. |
|
Catastrophe reinsurance |
|
A form of
excess-of-loss
reinsurance that, subject to a specified limit, indemnifies the
ceding company for the amount of loss in excess of a specified
retention with respect to an accumulation of losses resulting
from a catastrophic event. The actual reinsurance document is
called a catastrophe cover. These reinsurance
contracts are typically designed to cover property insurance
losses but can be written to cover other types of insurance
losses such as workers compensation policies. |
|
Cede, cedent, ceding company |
|
When an insurer transfers some or all of its risk to a
reinsurer, it cedes business and is referred to as
the ceding company or cedent. |
|
Commercial coverage |
|
Insurance products that are sold to entities and individuals in
their business or professional capacity, and which are intended
for other than the insureds personal or household use. |
|
Deductible |
|
The amount of exposure an insured retains on any one risk or
group of risks. The term may apply to an insurance policy, where
the insured is an individual or business, or a reinsurance
contract, where the insured is an insurance company. See
Retention. |
53
|
|
|
Direct insurance |
|
Insurance sold by an insurer that contracts directly with the
insured, as distinguished from reinsurance. |
|
Directors and officers liability |
|
Insurance that covers liability for corporate directors and
officers for wrongful acts, subject to applicable exclusions,
terms and conditions of the policy. |
|
Earned premiums or premiums earned |
|
That portion of premiums written that applies to the expired
portion of the policy term. Earned premiums are recognized as
revenues under both statutory accounting practice and U.S. GAAP. |
|
Employment practices liability insurance |
|
Insurance that primarily provides liability coverage to
organizations and their employees for losses arising from acts
of discrimination, harassment and retaliation against current
and prospective employees of the organization. |
|
Excess and surplus lines |
|
A risk or a part of a risk for which there is no insurance
market available among admitted insurers; or insurance written
by non-admitted insurance companies to cover such risks. |
|
Excess layer |
|
Insurance to cover losses in one or more layers above a certain
amount with losses below that amount usually covered by the
insureds primary policy and its self-insured retention. |
|
Excess-of-loss
reinsurance |
|
Reinsurance that indemnifies the insured against all or a
specified portion of losses over a specified amount or
retention. |
|
Exclusions |
|
Provisions in an insurance or reinsurance policy excluding
certain risks or otherwise limiting the scope of coverage. |
|
Exposure |
|
The possibility of loss. A unit of measure of the amount of risk
a company assumes. |
|
Facultative reinsurance |
|
The reinsurance of all or a portion of the insurance provided by
a single policy. Each policy reinsured is separately negotiated. |
|
Fiduciary liability insurance |
|
Insurance that primarily provides liability coverage to
fiduciaries of employee benefit and welfare plans for losses
arising from the breach of any fiduciary duty owed to plan
beneficiaries. |
|
Frequency |
|
The number of claims occurring during a specified period of time. |
|
General casualty |
|
Insurance that is primarily concerned with losses due to
injuries to persons and liability imposed on the insured for
such injury or for damage to the property of others. |
|
Gross premiums written |
|
Total premiums for insurance and reinsurance written during a
given period. |
|
Healthcare liability or Healthcare lines |
|
Insurance coverage, often referred to as medical malpractice
insurance, which addresses liability risks of doctors, surgeons,
nurses, other healthcare professionals and the institutions
(hospitals, clinics) in which they practice. |
54
|
|
|
Incurred but not reported (IBNR) reserves |
|
Reserves established by us for claims that have occurred but
have not yet been reported to us as well as for changes in the
values of claims that have been reported to us but are not yet
settled. |
|
In-force |
|
Policies that have not expired or been terminated and for which
the insurer remains on risk as of a given date. |
|
Limits or gross maximum limits |
|
The maximum amount that an insurer or reinsurer will insure or
reinsure for a specified risk, a portfolio of risks or on a
single insured entity. The term also refers to the maximum
amount of benefit payable for a given claim or occurrence. |
|
Loss development |
|
The difference between the original loss as initially reserved
by an insurer or reinsurer and its subsequent evaluation at a
later date or at the time of its closure. Loss development
occurs because of inflation and time lags between the occurrence
of claims and the time they are actually reported to an insurer
or reinsurer. To account for these increases, a loss
development factor or multiplier is usually applied to a
claim or group of claims in an effort to more accurately project
the ultimate amount that will be paid. |
|
Losses incurred |
|
The total losses and loss adjustment expenses paid, plus the
change in loss and loss adjustment expense reserves, including
IBNR, sustained by an insurance or reinsurance company under its
insurance policies or other insurance or reinsurance contracts. |
|
Losses and loss expenses |
|
Losses are an occurrence that is the basis for
submission or payment of a claim. Losses may be covered, limited
or excluded from coverage, depending on the terms of the
insurance policy or other insurance or reinsurance contracts.
Loss expenses are the expenses incurred by an
insurance or reinsurance company in settling a loss. |
|
Loss reserves |
|
Liabilities established by insurers and reinsurers to reflect
the estimated cost of claims incurred that the insurer or
reinsurer will ultimately be required to pay. Reserves are
established for losses and for loss expenses, and consist of
case reserves and IBNR reserves. As the term is used in this
Form 10-K,
loss reserves is meant to include reserves for both
losses and for loss expenses. |
|
Net premiums earned |
|
The portion of net premiums written during or prior to a given
period that was recognized as income during such period. |
|
Net premiums written |
|
Gross premiums written, less premiums ceded to reinsurers. |
|
Paid losses |
|
Claim amounts paid to insureds or ceding companies. |
|
Per occurrence limitations |
|
The maximum amount recoverable under an insurance or reinsurance
policy as a result of any one event, regardless of the number of
claims. |
|
Primary insurance (primary layer) |
|
Insurance that absorbs the losses immediately above the
insureds retention layer. A primary insurer will pay up to
a certain dollar amount of losses over the insureds
retention, at which point a higher layer excess insurer will be
liable for additional losses. The coverage terms of a primary
insurance layer typically assume an element of regular loss
frequency. |
|
Probable maximum loss (PML) |
|
An estimate of the loss on any given insurance policy or group
of policies at some pre-defined probability of occurrence. The
probability |
55
|
|
|
|
|
of occurrence is usually expressed in terms of the number of
years between loss events of that size (e.g., 1 in 100 years or
1 in 200 years). |
|
Producer |
|
A licensed professional, often referred to as either an
insurance agent, insurance broker or intermediary, who acts as
intermediary between the insurance carrier and the insured or
reinsured (as the case may be). |
|
Product liability |
|
Insurance that provides coverage to manufacturer and/or
distributors of tangible goods against liability for personal
injury caused if such products are unsafe or defective. |
|
Professional liability |
|
Insurance that provides liability coverage to directors and
officers, attorneys, doctors, accountants and other
professionals who offer services to the general public and claim
expertise in a particular area greater than the ordinary
layperson for their negligence or malfeasance. |
|
Property catastrophe coverage |
|
In reinsurance, coverage that protects the ceding company
against accumulated losses in excess of a stipulated sum that
arise from a catastrophic event such as an earthquake, fire or
windstorm. Catastrophe loss generally refers to the
total loss of an insurer arising out of a single catastrophic
event. |
|
Quota share reinsurance |
|
A proportional reinsurance treaty in which the ceding company
cedes an agreed-on percentage of every risk it insures that
falls within a class or classes of business subject to the
treaty. |
|
Reinstatement premium |
|
The premium paid by a ceding company for the right and,
typically the obligation to reinstate the portion of coverage
exhausted by prior claims. Reinstatement provisions typically
limit the amount of aggregate coverage for all claims during the
contract period and often require additional premium payments. |
|
Reinsurance |
|
The practice whereby one insurer, called the reinsurer, in
consideration of a premium paid to that reinsurer, agrees to
indemnify another insurer, called the ceding company, for part
or all of the liability of the ceding company under one or more
policies or contracts of insurance that it has issued. |
|
Reserves |
|
Liabilities established by insurers and reinsurers to reflect
the estimated cost of claims incurred that the insurer or
reinsurer will ultimately be required to pay. Reserves are
established for losses and for loss expenses, and consist of
case reserves and IBNR reserves. As the term is used in this
report, reserves are meant to include reserves for
both losses and for loss expenses. |
|
Retention |
|
The amount of exposure an insured retains on any one risk or
group of risks. The term may apply to an insurance policy, where
the insured is an individual or business, or a reinsurance
contract, where the insured is an insurance company. See
Deductible. |
|
Retrocessional coverage |
|
A transaction whereby a reinsurer cedes to another reinsurer,
the retrocessionaire, all or part of the reinsurance that the
first reinsurer has assumed. Retrocessional reinsurance does not
legally discharge the ceding reinsurer from its liability with
respect to its obligations to the reinsured. Reinsurance
companies cede risks to retrocessionaires for reasons similar to
those that cause insurers to purchase reinsurance: to reduce net
liability on individual risks, to protect against catastrophic |
56
|
|
|
|
|
losses, to stabilize financial ratios and to obtain additional
underwriting capacity. |
|
Run-off |
|
Liability of an insurance or reinsurance company for existing
claims that it expects to pay in the future and for which a loss
reserve has been established. |
|
Self-insured |
|
A term which describes a risk, or part of a risk, retained by
the insured in lieu of transferring the risk to an insurer. A
policy deductible or retention feature allows a policyholder to
self-insure a portion of an exposure and thereby reduce its
risk-transfer costs. |
|
Specialty lines |
|
A term used in the insurance and reinsurance industry to
describe types of insurance or classes of business that require
specialized expertise to underwrite. Insurance and reinsurance
for these classes of business is not widely available and is
typically purchased from the specialty lines divisions of larger
insurance companies or from small specialty lines insurers. |
|
Subpart F income |
|
Insurance and reinsurance income (including underwriting and
investment income) and foreign personal holding company income
(including interest, dividends and other passive investment
income). |
|
Surplus (or statutory surplus) |
|
As determined under statutory accounting principles, the amount
remaining after all liabilities, including loss reserves, are
subtracted from all of the admitted assets (i.e.,
those permitted by regulation to be recognized on the statutory
balance sheet). Surplus is also referred to as statutory
surplus or surplus as regards policyholders
for statutory accounting purposes. |
|
Surplus lines |
|
A risk or a part of a risk for which there is no insurance
market available among admitted insurers or insurance written by
non-admitted insurance companies to cover such risks. |
|
Swing-rated reinsurance contract |
|
A reinsurance contract, that links the ultimate amount of ceded
premium to the ultimate loss ratio on the reinsured business.
This type of reinsurance contract enables the cedent to retain a
greater portion of premium if the ultimate loss ratio develops
at a level below the initial loss threshold set by the
reinsurers, but requires a higher amount of ceded premium if the
ultimate loss ratio develops above the initial threshold. |
|
Treaties |
|
Reinsurance contacts under which the ceding company agrees to
cede and the reinsurer agrees to assume risks of a particular
class or classes of business. |
|
Treaty year |
|
The year in which the contract incepts. Exposure from contracts
incepting during the current treaty year will potentially affect
both the current accident year as well future accident years. |
|
Ultimate loss |
|
Total of all expected settlement amounts, whether paid or
reserved together with any associated loss adjustment expenses,
and is the estimated total amount of loss at the measurement
date. For purposes of this
Form 10-K,
ultimate loss is the sum of paid losses, case
reserves and IBNR. |
|
Underwriter |
|
An employee of an insurance or reinsurance company who examines,
accepts or rejects risks and classifies accepted risks in order
to charge |
57
|
|
|
|
|
an appropriate premium for each accepted risk. The underwriter
is expected to select business that will produce an average risk
of loss no greater than that anticipated for the class of
business. |
|
Underwriting results |
|
The pre-tax profit or loss experienced by an insurance company
that is calculated by deducting net losses and loss expenses,
net acquisition costs and general and administration expenses
from net premiums earned. This profit or loss calculation
includes reinsurance assumed and ceded but excludes investment
income. |
|
Unearned premium |
|
The portion of premiums written that is allocable to the
unexpired portion of the policy term or underlying risk. |
|
Working layer |
|
Primary insurance that absorbs the losses immediately above the
insureds retention layer. A working layer insurer will pay
up to a certain dollar amount of losses over the insureds
retention, at which point a higher layer excess insurer will be
liable for additional losses. The coverage terms of a working
layer typically assume an element of loss frequency. |
|
Written premium |
|
The premium entered on an insurers books for a policy
issued during a given period of time, whether coverage is
provided only during that period of time or also during
subsequent periods. |
58
Item 2. Properties.
Our corporate headquarters are located in offices we lease in
Switzerland. We also lease space in Bermuda, England, Hong Kong,
Ireland, Singapore and the United States for the operation of
our U.S. insurance, international insurance and reinsurance
segments. Our leases have remaining terms ranging from seven
months to approximately 11 years in length. We renew and
enter into new leases in the ordinary course of business as
needed. While we believe that the office space from these leased
properties is sufficient for us to conduct our operations for
the foreseeable future, we may need to expand into additional
facilities to accommodate future growth. For more information on
our leasing arrangements, please see Note 15 of the notes
to the consolidated financial statements in this
Form 10-K.
|
|
Item 3.
|
Legal
Proceedings.
|
On April 4, 2006, a complaint was filed in the
U.S. District Court for the Northern District of Georgia
(Atlanta Division) by a group of several corporations and
certain of their related entities in an action entitled New
Cingular Wireless Headquarters, LLC et al, as plaintiffs,
against certain defendants, including Marsh & McLennan
Companies, Inc., Marsh Inc. and Aon Corporation, in their
capacities as insurance brokers, and 78 insurers, including our
insurance subsidiary in Bermuda, Allied World Assurance Company,
Ltd.
The action generally relates to broker defendants
placement of insurance contracts for plaintiffs with the 78
insurer defendants. Plaintiffs maintain that the defendants used
a variety of illegal schemes and practices designed to, among
other things, allocate customers, rig bids for insurance
products and raise the prices of insurance products paid by the
plaintiffs. In addition, plaintiffs allege that the broker
defendants steered policyholders business to preferred
insurer defendants. Plaintiffs claim that as a result of these
practices, policyholders either paid more for insurance products
or received less beneficial terms than the competitive market
would have produced. The eight counts in the complaint allege,
among other things, (i) unreasonable restraints of trade
and conspiracy in violation of the Sherman Act,
(ii) violations of the Racketeer Influenced and Corrupt
Organizations Act, or RICO, (iii) that broker defendants
breached their fiduciary duties to plaintiffs, (iv) that
insurer defendants participated in and induced this alleged
breach of fiduciary duty, (v) unjust enrichment,
(vi) common law fraud by broker defendants and
(vii) statutory and consumer fraud under the laws of
certain U.S. states. Plaintiffs seek equitable and legal
remedies, including injunctive relief, unquantified
consequential and punitive damages, and treble damages under the
Sherman Act and RICO. On October 16, 2006, the Judicial
Panel on Multidistrict Litigation ordered that the litigation be
transferred to the U.S. District Court for the District of
New Jersey for inclusion in the coordinated or consolidated
pretrial proceedings occurring in that court. The Court stayed
proceedings in the litigation pending a decision by the Third
Circuit Court of Appeals on an appeal of the courts
decisions granting motions to dismiss in a related putative
class action. Because of the stay, neither Allied World
Assurance Company, Ltd nor any of the other defendants have
responded to the complaint and written discovery that had begun
has not been completed. On August 16, 2010, the Third
Circuit issued its ruling in the related action, affirming the
dismissal in large part, vacating it in part and remanding that
case for further proceedings. On October 5, 2010, the court
decided to extend the current stay until after it decides the
renewed motions to dismiss the class action complaint that have
been filed. At this point, it is not possible to predict the
outcome of the litigation; the company does not, however,
currently believe that the outcome will have a material adverse
effect on the companys operations or financial position.
We may become involved in various claims and legal proceedings
that arise in the normal course of our business, which are not
likely to have a material adverse effect on our results of
operations.
59
|
|
Item 4.
|
[Removed
and Reserved].
|
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Our common shares began publicly trading on the New York Stock
Exchange under the symbol AWH on July 12, 2006.
As a result of the Redomestication described in Item 1.
Business, Holdings became the parent company of our
group of companies and our common shares continue to be listed
on the New York Stock Exchange under the same symbol
AWH. The following table sets forth, for the periods
indicated, the high and low sales prices per share of our common
shares as reported on the New York Stock Exchange Composite Tape.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2010:
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
47.05
|
|
|
$
|
43.77
|
|
Second quarter
|
|
$
|
47.96
|
|
|
$
|
40.60
|
|
Third quarter
|
|
$
|
57.25
|
|
|
$
|
44.42
|
|
Fourth quarter
|
|
$
|
61.24
|
|
|
$
|
54.53
|
|
|
|
|
|
|
|
|
|
|
2009:
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
42.68
|
|
|
$
|
32.23
|
|
Second quarter
|
|
$
|
41.32
|
|
|
$
|
35.43
|
|
Third quarter
|
|
$
|
49.76
|
|
|
$
|
39.93
|
|
Fourth quarter
|
|
$
|
49.31
|
|
|
$
|
44.32
|
|
On February 22, 2011, the last reported sale price for our
common shares was $61.51 per share. At February 21, 2011,
there were 41 holders of record of our common shares.
During the year ended December 31, 2009, we declared a
regular quarterly dividend of $0.18 per common share during for
the first, second and third quarters, and a regular quarterly
dividend of $0.20 per common share for the fourth quarter.
During the year ended December 31, 2010, we declared a
regular quarterly dividend of $0.20 per common share for each
quarter. Additionally, on November 4, 2010, the Board
declared a special dividend of $0.25 per share. Because Swiss
law prevents the company from paying a dividend until at least
two months following the annual shareholder meeting in May 2011,
the special dividend provided for a distribution to shareholders
for the interim period between the effectiveness of the
Redomestication and the next available regular dividend payment
date. The special dividend was paid on November 26, 2010.
The continued declaration and payment of dividends to holders of
common shares is expected but will be at the discretion of our
Board of Directors and subject to legal, regulatory, financial
and other restrictions. Specifically, any future declaration and
payment of any cash dividends by the company will:
|
|
|
|
|
depend upon its results of operations, financial condition, cash
requirements and other relevant factors;
|
|
|
|
be subject to shareholder approval;
|
|
|
|
be subject to restrictions contained in our credit facilities
and other debt covenants; and
|
|
|
|
be subject to other restrictions on dividends imposed by Swiss
law.
|
Under Swiss law, our shareholders have the power to declare
dividends without the agreement of the Board of Directors.
Consequently, dividends may be declared by resolution of the
shareholders even if our Board of Directors and management do
not believe it is in the best interest of the company or the
shareholders. As a holding company, our principal source of
income is dividends or other statutorily permissible payments
from our subsidiaries. The ability of our subsidiaries to pay
dividends is limited by the applicable laws and regulations of
the various countries in which we operate, including Bermuda,
the United States and Ireland. See Item 1.
Business Regulatory Matters,
Item 1A. Risk Factors Our holding company
structure and regulatory and other constraints affect our
60
ability to pay dividends and make other payments,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources Restrictions and
Specific Requirements and Note 16 of the notes to
consolidated financial statements included in this
Form 10-K.
Issuer
Purchases of Equity Securities
The following table summarizes our repurchases of our common
shares during the three months ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Dollar Value
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
(or Approximate
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
Dollar Value) of
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Part of Publicly
|
|
|
Shares that May Yet
|
|
|
|
Shares
|
|
|
Paid
|
|
|
Announced Plans or
|
|
|
be Purchased Under
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Programs
|
|
|
the Plans or Programs
|
|
|
October 1 31, 2010
|
|
|
215,549
|
|
|
$
|
56.98
|
|
|
|
215,549
|
|
|
$
|
322,709,721
|
|
November 1 30, 2010
|
|
|
3,745,031
|
|
|
|
58.77
|
|
|
|
585,238
|
(1)
|
|
|
288,055,585
|
|
December 1 31, 2010
|
|
|
451,166
|
|
|
|
60.26
|
|
|
|
451,166
|
|
|
|
260,872,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,411,716
|
|
|
$
|
58.84
|
|
|
|
1,251,953
|
|
|
$
|
260,872,492
|
(2)
|
|
|
|
(1) |
|
Does not include 3,159,793 of our common shares included in the
Total Number of Shares Purchased column in the table
above that we repurchased outside of the share repurchase
program. On November 5, 2010, we entered into a repurchase
agreement with certain affiliates of The Goldman Sachs Group,
Inc. (Goldman Sachs), pursuant to which we
repurchased the remainder of common shares as well as warrants
to purchase an additional 1,500,000 common shares that were held
by such affiliates. |
|
(2) |
|
In May 2010, the company established a share repurchase program
in order to repurchase Holdings common shares. Repurchases
may be effected from time to time through open market purchases,
privately negotiated transactions and tender offers or
otherwise. However, pursuant to Swiss law, shareholder approval
of share repurchases is required. Prior to the Redomestication,
Allied World Bermuda, as the sole shareholder of Holdings,
approved the repurchase of Holdings shares in an amount
not to exceed $160 million, which represented a portion of
the remaining capacity available under the original May
2010 share repurchase authorization. At our annual
shareholder meeting in May 2011, we intend to seek approval from
our shareholders for the $122.5 million of remaining
capacity available under such authorization. The total amount in
the table above that may be purchased under our share repurchase
program assumes that our shareholders will approve the
additional remaining capacity in May 2011. |
61
Performance
Graph
The following information is not deemed to be soliciting
material or to be filed with the SEC or
subject to the liabilities of Section 18 of the Exchange
Act, and the report shall not be deemed to be incorporated by
reference into any prior or subsequent filing by the company
under the Securities Act or the Exchange Act.
The following graph shows the cumulative total return, including
reinvestment of dividends, on the common shares compared to such
return for Standard & Poors 500 Composite Stock
Price Index (S&P 500), and Standard &
Poors Property & Casualty Insurance Index for
the period beginning on July 11, 2006 and ending on
December 31, 2010, assuming $100 was invested on
July 11, 2006. The measurement point on the graph
represents the cumulative shareholder return as measured by the
last reported sale price on such date during the relevant period.
TOTAL
RETURN TO SHAREHOLDERS
(INCLUDES REINVESTMENT OF DIVIDENDS)
COMPARISON OF CUMULATIVE TOTAL RETURN
62
|
|
Item 6.
|
Selected
Financial Data.
|
The following table sets forth our summary historical statement
of operations data and summary balance sheet data as of and for
the years ended December 31, 2010, 2009, 2008, 2007 and
2006. Statement of operations data and balance sheet data are
derived from our audited consolidated financial statements,
which have been prepared in accordance with U.S. GAAP.
These historical results are not necessarily indicative of
results to be expected from any future period. For further
discussion of this risk see Item 1A. Risk
Factors in this
Form 10-K.
You should read the following selected financial data in
conjunction with the other information contained in this
Form 10-K,
including Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations
and Item 8. Financial Statements and Supplementary
Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions, except per share amounts and ratios)
|
|
|
Summary Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
1,758.4
|
|
|
$
|
1,696.3
|
|
|
$
|
1,445.6
|
|
|
$
|
1,505.5
|
|
|
$
|
1,659.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
1,392.4
|
|
|
$
|
1,321.1
|
|
|
$
|
1,107.2
|
|
|
$
|
1,153.1
|
|
|
$
|
1,306.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
1,359.5
|
|
|
$
|
1,316.9
|
|
|
$
|
1,117.0
|
|
|
$
|
1,159.9
|
|
|
$
|
1,252.0
|
|
Net investment income
|
|
|
244.1
|
|
|
|
300.7
|
|
|
|
308.8
|
|
|
|
297.9
|
|
|
|
244.4
|
|
Net realized investment gains (losses)
|
|
|
285.6
|
|
|
|
126.4
|
|
|
|
(60.0
|
)
|
|
|
37.0
|
|
|
|
(4.8
|
)
|
Net impairment charges recognized in earnings
|
|
|
(0.2
|
)
|
|
|
(49.6
|
)
|
|
|
(212.9
|
)
|
|
|
(44.6
|
)
|
|
|
(23.9
|
)
|
Other income
|
|
|
0.9
|
|
|
|
1.5
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
Net losses and loss expenses
|
|
|
707.9
|
|
|
|
604.1
|
|
|
|
641.1
|
|
|
|
682.3
|
|
|
|
739.1
|
|
Acquisition costs
|
|
|
159.5
|
|
|
|
148.9
|
|
|
|
112.6
|
|
|
|
119.0
|
|
|
|
141.5
|
|
General and administrative expenses
|
|
|
286.5
|
|
|
|
248.6
|
|
|
|
185.9
|
|
|
|
141.6
|
|
|
|
106.1
|
|
Amortization and impairment of intangible assets
|
|
|
3.5
|
|
|
|
11.1
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
40.2
|
|
|
|
39.0
|
|
|
|
38.7
|
|
|
|
37.8
|
|
|
|
32.6
|
|
Foreign exchange loss (gain)
|
|
|
0.4
|
|
|
|
0.7
|
|
|
|
(1.4
|
)
|
|
|
(0.8
|
)
|
|
|
0.6
|
|
Income tax expense (benefit)
|
|
|
26.9
|
|
|
|
36.6
|
|
|
|
(7.6
|
)
|
|
|
1.1
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
665.0
|
|
|
$
|
606.9
|
|
|
$
|
183.6
|
|
|
$
|
469.2
|
|
|
$
|
442.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
14.30
|
|
|
$
|
12.26
|
|
|
$
|
3.75
|
|
|
$
|
7.84
|
|
|
$
|
8.09
|
|
Diluted
|
|
|
13.32
|
|
|
|
11.67
|
|
|
|
3.59
|
|
|
|
7.53
|
|
|
|
7.75
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
46,491,279
|
|
|
|
49,503,438
|
|
|
|
48,936,912
|
|
|
|
59,846,987
|
|
|
|
54,746,613
|
|
Diluted
|
|
|
49,913,317
|
|
|
|
51,992,674
|
|
|
|
51,147,215
|
|
|
|
62,331,165
|
|
|
|
57,115,172
|
|
Dividends declared per share
|
|
$
|
1.05
|
|
|
$
|
0.74
|
|
|
$
|
0.72
|
|
|
$
|
0.63
|
|
|
$
|
0.15
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Selected Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio(2)
|
|
|
52.1
|
%
|
|
|
45.9
|
%
|
|
|
57.4
|
%
|
|
|
58.8
|
%
|
|
|
59.0
|
%
|
Acquisition cost ratio(3)
|
|
|
11.7
|
%
|
|
|
11.3
|
%
|
|
|
10.1
|
%
|
|
|
10.3
|
%
|
|
|
11.3
|
%
|
General and administrative expense ratio(4)
|
|
|
21.1
|
%
|
|
|
18.9
|
%
|
|
|
16.6
|
%
|
|
|
12.2
|
%
|
|
|
8.5
|
%
|
Expense ratio(5)
|
|
|
32.8
|
%
|
|
|
30.2
|
%
|
|
|
26.7
|
%
|
|
|
22.5
|
%
|
|
|
19.8
|
%
|
Combined ratio(6)
|
|
|
84.9
|
%
|
|
|
76.1
|
%
|
|
|
84.1
|
%
|
|
|
81.3
|
%
|
|
|
78.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions, except per share amounts and ratios)
|
|
Summary Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
757.0
|
|
|
$
|
292.2
|
|
|
$
|
655.8
|
|
|
$
|
202.6
|
|
|
$
|
366.8
|
|
Investments at fair value
|
|
|
7,183.6
|
|
|
|
7,156.3
|
|
|
|
6,157.1
|
|
|
|
6,029.3
|
|
|
|
5,440.3
|
|
Reinsurance recoverable
|
|
|
927.6
|
|
|
|
920.0
|
|
|
|
888.3
|
|
|
|
682.8
|
|
|
|
689.1
|
|
Total assets
|
|
|
10,427.6
|
|
|
|
9,653.2
|
|
|
|
9,022.5
|
|
|
|
7,899.1
|
|
|
|
7,620.6
|
|
Reserve for losses and loss expenses
|
|
|
4,879.2
|
|
|
|
4,761.8
|
|
|
|
4,576.8
|
|
|
|
3,919.8
|
|
|
|
3,637.0
|
|
Unearned premium
|
|
|
962.2
|
|
|
|
928.6
|
|
|
|
930.4
|
|
|
|
811.1
|
|
|
|
813.8
|
|
Total debt
|
|
|
797.7
|
|
|
|
498.9
|
|
|
|
742.5
|
|
|
|
498.7
|
|
|
|
498.6
|
|
Total shareholders equity
|
|
|
3,075.8
|
|
|
|
3,213.3
|
|
|
|
2,416.9
|
|
|
|
2,239.8
|
|
|
|
2,220.1
|
|
|
|
|
(1) |
|
Please refer to Note 13 of the notes to consolidated
financial statements for the calculation of basic and diluted
earnings per share. |
|
(2) |
|
Calculated by dividing net losses and loss expenses by net
premiums earned. |
|
(3) |
|
Calculated by dividing acquisition costs by net premiums earned. |
|
(4) |
|
Calculated by dividing general and administrative expenses by
net premiums earned. |
|
(5) |
|
Calculated by combining the acquisition cost ratio and the
general and administrative expense ratio. |
|
(6) |
|
Calculated by combining the loss ratio, acquisition cost ratio
and general and administrative expense ratio. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Some of the statements in this
Form 10-K
include forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995 that involve
inherent risks and uncertainties. These statements include in
general forward-looking statements both with respect to us and
the insurance industry. Statements that are not historical
facts, including statements that use terms such as
anticipates, believes,
expects, intends, plans,
projects, seeks and will and
that relate to our plans and objectives for future operations,
are forward-looking statements. In light of the risks and
uncertainties inherent in all forward-looking statements, the
inclusion of such statements in this
Form 10-K
should not be considered as a representation by us or any other
person that our objectives or plans will be achieved. These
statements are based on current plans, estimates and
expectations. Actual results may differ materially from those
projected in such forward-looking statements and therefore you
should not place undue reliance on them. Important factors that
could cause actual results to differ materially from those in
such forward-looking statements are set forth in Item 1A.
Risk Factors in this
Form 10-K.
We undertake no obligation to release publicly the results of
any future revisions we make to the forward-looking statements
to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
64
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. We manage our business through
three operating segments: U.S. insurance, international
insurance and reinsurance. As of December 31, 2010, we had
approximately $10.4 billion of total assets,
$3.1 billion of total shareholders equity and
$3.9 billion of total capital, which includes
shareholders equity and senior notes.
During the year ended December 31, 2010, we experienced
premium rate declines across all of our operating segments and
most lines of business. We believe the premium rate decreases
are due to increased competition, increased capacity and an
absence of large severity casualty losses. We expect this trend
to continue into 2011. Despite the challenging pricing
environment, we believe that there are opportunities where
certain products have adequate premium rates and that the
expanded breadth of our operations allows us to target those
classes of business. Given these trends, we continue to be
selective in the policies and reinsurance contracts we
underwrite. Our consolidated gross premiums written increased by
$62.1 million, or 3.7%, for the year ended
December 31, 2010 compared to the year ended
December 31, 2009. Our net income for the year ended
December 31, 2010 increased by $58.1 million, or 9.6%,
to $665.0 million compared to $606.9 million for the
year ended December 31, 2009. The increase in net income
for the year ended December 31, 2010 compared to the year
ended December 31, 2009 was primarily due to higher net
realized investment gains and lower
other-than-temporary-impairment
charges (OTTI), partially offset by higher net
losses and loss expenses due to increased property losses.
Recent
Developments
Redomestication
to Switzerland
On November 26, 2010, we received approval from the Supreme
Court of Bermuda to change the place of incorporation of our
ultimate parent company from Bermuda to Switzerland. We
completed the Redomestication on December 1, 2010. After
the Redomestication, Holdings is now our ultimate parent company
and Allied World Bermuda is a wholly owned subsidiary of
Holdings. To affect the Redomestication on December 1,
2010, Holdings and Allied World Bermuda entered into a
contribution-in-kind
agreement. Under the terms of the
contribution-in-kind
agreement all issued and outstanding voting and non-voting
shares of Allied World Bermuda were cancelled and issued to
Holdings as a
contribution-in-kind
in exchange for which the holders of such voting and non-voting
shares immediately prior to the completion of the
Redomestication received the same number of voting and
non-voting shares of Holdings. As a result of the
contribution-in-kind
and the resulting par value changing from $0.03 to CHF 15.00,
the share capital balance was increased to CHF
600.1 million with an equal reduction in additional paid-in
capital. At the time of
contribution-in-kind,
the exchange rate between the U.S. dollar and Swiss Franc
was
one-for-one.
Share
Repurchase Activities
In May 2010, the company established a share repurchase program
in order to repurchase Holdings common shares. Repurchases
may be effected from time to time through open market purchases,
privately negotiated transactions, and 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. As part of the share repurchase
program, we entered into a
rule 10b5-1
repurchase plan that enables us to complete share repurchases
during trading blackout periods. During the year ended
December 31, 2010, we repurchased through open-market
purchases 4,651,279 shares at a total cost of
$239.1 million, for an average price of $51.41 per share.
We have classified these repurchased shares as
treasury shares, at cost on the consolidated
balance sheets.
In August 2010, we repurchased 5,000,000 of our common shares
for $250.0 million, or $50.00 per share, in a privately
negotiated transaction from Goldman Sachs. Also in August 2010,
we repurchased a warrant owned by Chubb in a privately
negotiated transaction. The warrant entitled Chubb to purchase
2,000,000 of our common shares for $34.20 per share. We
repurchased the warrant for an aggregate purchase price of
$32.8 million. Both of
65
the aforementioned transactions were funded using available cash
on hand and were executed separately from the Companys
share repurchase program.
In November 2010, we repurchased the remaining 3,159,793 common
shares and a warrant to purchase an additional 1,500,000 of our
common shares from Goldman Sachs. The aggregate purchase price
for these securities was $222.6 million, of which
$185.4 million, or $58.69 per share, related to the
repurchase of the common shares and $37.2 million related
to the purchase of the warrant. The repurchase price per common
share was based on and reflected a 0.5% discount from the
volume-weighted average trading price of the Companys
common shares on November 5, 2010. The repurchase price per
common share underlying the warrant is equal to the
volume-weighted average trading price of the companys
common shares on November 5, 2010, less the exercise price
for such warrant of $34.20 per share plus $0.01 per share. Both
of the aforementioned transactions were executed separately from
the Companys share repurchase program.
The common shares repurchased from Goldman Sachs were classified
as treasury shares, at cost, and the repurchase of
the warrants from Chubb and Goldman Sachs was recognized as a
reduction in additional paid-in capital on the
consolidated balance sheets.
As required under Swiss law, we can not hold more than 10% of
its registered capital in treasury shares, unless we receive
shareholder approval to do so. As a result, immediately prior to
the Redomestication, we cancelled 10,879,106 shares held in
treasury with a related reduction to additional paid-in
capital of $561.8 million.
In February 2011, we repurchased a warrant owned by AIG in a
privately negotiated transaction. The warrant entitled AIG to
purchase 2,000,000 of our common shares for $34.20 per share. We
repurchased the warrant for an aggregate purchase price of
$53.6 million. The repurchase of the warrant will be
recognized as a reduction in additional paid-in
capital in the consolidated balance sheets. The repurchase
was executed separately from the Companys share repurchase
program.
Issuance
of Senior Notes
In November 2010, Allied World Bermuda issued $300 million
senior notes due in 2020. The senior notes bear interest at an
annual rate of 5.50% per year and were priced to yield 5.56%.
Interest on the senior notes is payable semi-annually on May 15
and November 15 of each year commencing on May 15, 2011.
The net proceeds from the offering of the senior notes will be
used for general corporate purposes, including the repurchase of
the companys outstanding common shares of one shareholder
or potential acquisitions. The senior notes are the
companys unsecured and unsubordinated obligations and rank
equally in right of payment with all existing and future
unsecured and unsubordinated indebtedness. We may redeem the
senior notes at any time or from time to time in whole or in
part at a redemption price equal to the greater of the principal
amount of the senior notes to be redeemed or a make-whole price,
plus accrued and unpaid interest. The senior notes includes
covenants and events of default that are usual and customary,
but do not contain any financial covenants. In addition, these
senior notes as well as the senior notes issued in 2006 have
been unconditionally and irrevocably guaranteed for the payment
of the principal and interest by Allied World Switzerland.
Adoption
of ASU
2010-11
In March 2010, the Financial Accounting Standards Board
(FASB) issued Accounting Standard Update ASU
2010-11
Derivatives and Hedging: Scope Exception Related to
Embedded Credit Derivatives
(ASU 2010-11).
On July 1, 2010, in accordance with ASU
2010-11, we
elected the fair value option for all of our mortgage-backed and
asset-backed securities. As a result of the fair value election,
any changes in the fair value of the mortgage-backed and
asset-backed securities will be recognized through earnings in
net realized investment gains (losses) on the
consolidated statements of operations and comprehensive income
(consolidated income statements). On July 1,
2010, we reclassified $968.8 million of mortgage-backed and
asset-backed securities, combined, from fixed maturity
investments available for sale, at fair value to
fixed maturity investments trading, at fair value on
the consolidated balance sheets. Also on July 1, 2010, we
reclassified $41.9 million of net unrealized gains from
accumulated other comprehensive income to
retained earnings on the consolidated balance sheets.
66
Financial
Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in millions except share and per share data)
|
|
|
Gross premiums written
|
|
$
|
1,758.4
|
|
|
$
|
1,696.3
|
|
|
$
|
1,445.6
|
|
Net income
|
|
|
665.0
|
|
|
|
606.9
|
|
|
|
183.6
|
|
Operating income
|
|
|
397.8
|
|
|
|
537.7
|
|
|
|
455.1
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14.30
|
|
|
$
|
12.26
|
|
|
$
|
3.75
|
|
Operating income
|
|
$
|
8.56
|
|
|
$
|
10.86
|
|
|
$
|
9.30
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13.32
|
|
|
$
|
11.67
|
|
|
$
|
3.59
|
|
Operating income
|
|
$
|
7.97
|
|
|
$
|
10.34
|
|
|
$
|
8.90
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
46,491,279
|
|
|
|
49,503,438
|
|
|
|
48,936,912
|
|
Diluted
|
|
|
49,913,317
|
|
|
|
51,992,674
|
|
|
|
51,147,215
|
|
Basic book value per common share
|
|
$
|
80.75
|
|
|
$
|
64.61
|
|
|
$
|
49.29
|
|
Diluted book value per common share
|
|
$
|
74.29
|
|
|
$
|
59.56
|
|
|
$
|
46.05
|
|
Annualized return on average equity (ROAE), net income
|
|
|
21.9
|
%
|
|
|
22.6
|
%
|
|
|
8.3
|
%
|
Annualized ROAE, operating income
|
|
|
13.1
|
%
|
|
|
20.0
|
%
|
|
|
20.6
|
%
|
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 U.S. GAAP.
Operating
income & 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, impairment of intangible assets and foreign exchange
gain or loss. We exclude net realized investment gains or
losses, net impairment charges recognized in earnings and net
foreign exchange gain or loss from our calculation of operating
income because the amount of these gains or losses is heavily
influenced by and fluctuates in part according to the
availability of market opportunities and other factors. We
exclude impairment of intangible assets as these are
non-recurring charges. 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
67
income. The following is a reconciliation of operating income to
its most closely related U.S. GAAP measure, net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in millions except per share data)
|
|
|
Net income
|
|
$
|
665.0
|
|
|
$
|
606.9
|
|
|
$
|
183.6
|
|
Add after tax affect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment (gains) losses
|
|
|
(267.7
|
)
|
|
|
(126.4
|
)
|
|
|
60.0
|
|
Net impairment charges recognized in earnings
|
|
|
0.1
|
|
|
|
49.6
|
|
|
|
212.9
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
6.9
|
|
|
|
|
|
Foreign exchange loss (gain)
|
|
|
0.4
|
|
|
|
0.7
|
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
397.8
|
|
|
$
|
537.7
|
|
|
$
|
455.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14.30
|
|
|
$
|
12.26
|
|
|
$
|
3.75
|
|
Add after tax affect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment (gains) losses
|
|
|
(5.75
|
)
|
|
|
(2.55
|
)
|
|
|
1.23
|
|
Net impairment charges recognized in earnings
|
|
|
|
|
|
|
1.00
|
|
|
|
4.35
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
0.14
|
|
|
|
|
|
Foreign exchange loss (gain)
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
8.56
|
|
|
$
|
10.86
|
|
|
$
|
9.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13.32
|
|
|
$
|
11.67
|
|
|
$
|
3.59
|
|
Add after tax affect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment (gains) losses
|
|
|
(5.36
|
)
|
|
|
(2.43
|
)
|
|
|
1.17
|
|
Net impairment charges recognized in earnings
|
|
|
|
|
|
|
0.96
|
|
|
|
4.16
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
0.13
|
|
|
|
|
|
Foreign exchange loss (gain)
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
7.97
|
|
|
$
|
10.34
|
|
|
$
|
8.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in millions except share and per share data)
|
|
|
Price per share at period end
|
|
$
|
59.44
|
|
|
$
|
46.07
|
|
|
$
|
40.60
|
|
Total shareholders equity
|
|
$
|
3,075.8
|
|
|
$
|
3,213.3
|
|
|
$
|
2,416.9
|
|
Basic common shares outstanding
|
|
|
38,089,226
|
|
|
|
49,734,487
|
|
|
|
49,036,159
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted share units
|
|
|
571,178
|
|
|
|
915,432
|
|
|
|
971,907
|
|
Performance based equity awards
|
|
|
1,440,017
|
|
|
|
1,583,237
|
|
|
|
1,345,903
|
|
Employee purchase plan
|
|
|
10,576
|
|
|
|
|
|
|
|
|
|
Dilutive options/warrants outstanding
|
|
|
3,272,739
|
|
|
|
6,805,157
|
|
|
|
6,371,151
|
|
Weighted average exercise price per share
|
|
$
|
35.98
|
|
|
$
|
34.44
|
|
|
$
|
33.38
|
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options bought back via treasury method
|
|
|
(1,980,884
|
)
|
|
|
(5,087,405
|
)
|
|
|
(5,237,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares and common share equivalents outstanding
|
|
|
41,402,852
|
|
|
|
53,950,908
|
|
|
|
52,487,155
|
|
Basic book value per common share
|
|
$
|
80.75
|
|
|
$
|
64.61
|
|
|
$
|
49.29
|
|
Diluted book value per common share
|
|
$
|
74.29
|
|
|
$
|
59.56
|
|
|
$
|
46.05
|
|
Annualized
return on average equity
Annualized return on average shareholders equity
(ROAE) is calculated using average 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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in millions)
|
|
|
Opening shareholders equity
|
|
$
|
3,213.3
|
|
|
$
|
2,416.9
|
|
|
$
|
2,239.8
|
|
Deduct: accumulated other comprehensive income
|
|
|
(149.8
|
)
|
|
|
(105.6
|
)
|
|
|
(136.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted opening shareholders equity
|
|
$
|
3,063.5
|
|
|
$
|
2,311.3
|
|
|
$
|
2,103.6
|
|
Closing shareholders equity
|
|
$
|
3,075.8
|
|
|
$
|
3,213.3
|
|
|
$
|
2,416.9
|
|
Deduct: accumulated other comprehensive income
|
|
|
(57.1
|
)
|
|
|
(149.8
|
)
|
|
|
(105.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted closing shareholders equity
|
|
$
|
3,018.7
|
|
|
$
|
3,063.5
|
|
|
$
|
2,311.3
|
|
Average shareholders equity
|
|
$
|
3,041.1
|
|
|
$
|
2,687.3
|
|
|
$
|
2,207.4
|
|
Net income available to shareholders
|
|
$
|
665.0
|
|
|
$
|
606.9
|
|
|
$
|
183.6
|
|
Annualized return on average shareholders
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
net income available to shareholders
|
|
|
21.9
|
%
|
|
|
22.6
|
%
|
|
|
8.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income available to shareholders
|
|
$
|
397.8
|
|
|
$
|
537.7
|
|
|
$
|
455.1
|
|
Annualized return on average shareholders
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
operating income available to shareholders
|
|
|
13.1
|
%
|
|
|
20.0
|
%
|
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
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, 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.
Due to changes in the recognition and presentation of OTTI of
our available for sale debt securities based on guidance issued
by the FASB in April 2009, OTTI, which was previously included
in net realized investment gains or losses, will be
presented separately in the consolidated income statements as
net impairment charges recognized in earnings. See
-Critical Accounting Policies-Other-Than-Temporary
Impairments of Investments for further discussion of the
recognition and presentation of OTTI.
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
and insurance taxes. 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 acquisition costs relating to
unearned premiums and (3) including the amortization of
previously deferred acquisition costs.
General and administrative expenses include personnel expenses
including stock-based compensation expense, rent expense,
professional fees, information technology costs and other
general operating expenses. We are experiencing increases in
general and administrative expenses resulting from additional
staff, increased stock-based compensation expense and increased
professional fees.
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.
70
Critical
Accounting Policies
It is important to understand our accounting policies in order
to understand our financial position and results of operations.
Our 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. The following are
the accounting estimates that, in managements judgment,
are critical due to the judgments, assumptions and uncertainties
underlying the application of those estimates and the potential
for results to differ from managements assumptions.
Reserve
for Losses and Loss Expenses
Reserves for losses and loss expenses by segment as of
December 31, 2010, 2009 and 2008 were comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Insurance
|
|
|
International Insurance
|
|
|
Reinsurance
|
|
|
Total
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in millions)
|
|
|
Case reserves
|
|
$
|
295.3
|
|
|
$
|
268.1
|
|
|
$
|
257.3
|
|
|
$
|
498.3
|
|
|
$
|
570.4
|
|
|
$
|
619.3
|
|
|
$
|
373.0
|
|
|
$
|
313.5
|
|
|
$
|
256.3
|
|
|
$
|
1,166.5
|
|
|
$
|
1,152.0
|
|
|
$
|
1,132.9
|
|
IBNR
|
|
|
1,136.4
|
|
|
|
985.6
|
|
|
|
871.2
|
|
|
|
1,728.4
|
|
|
|
1,786.0
|
|
|
|
1,753.7
|
|
|
|
847.8
|
|
|
|
838.2
|
|
|
|
819.0
|
|
|
|
3,712.7
|
|
|
|
3,609.8
|
|
|
|
3,443.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss expenses
|
|
|
1,431.7
|
|
|
|
1,253.7
|
|
|
|
1,128.5
|
|
|
|
2,226.7
|
|
|
|
2,356.4
|
|
|
|
2,373.0
|
|
|
|
1,220.8
|
|
|
|
1,151.7
|
|
|
|
1,075.3
|
|
|
|
4,879.2
|
|
|
|
4,761.8
|
|
|
|
4,576.8
|
|
Reinsurance recoverables
|
|
|
(396.6
|
)
|
|
|
(351.8
|
)
|
|
|
(309.1
|
)
|
|
|
(531.0
|
)
|
|
|
(566.3
|
)
|
|
|
(576.0
|
)
|
|
|
|
|
|
|
(1.9
|
)
|
|
|
(3.2
|
)
|
|
|
(927.6
|
)
|
|
|
(920.0
|
)
|
|
|
(888.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserve for losses and loss expenses
|
|
$
|
1,035.1
|
|
|
$
|
901.9
|
|
|
$
|
819.4
|
|
|
$
|
1,695.7
|
|
|
$
|
1,790.1
|
|
|
$
|
1,797.0
|
|
|
$
|
1,220.8
|
|
|
$
|
1,149.8
|
|
|
$
|
1,072.1
|
|
|
$
|
3,951.6
|
|
|
$
|
3,841.8
|
|
|
$
|
3,688.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reserve for losses and loss expenses is comprised of two
main elements: outstanding loss reserves, also known as case
reserves, and reserves for IBNR. Outstanding loss reserves
relate to known claims and represent managements best
estimate of the likely loss settlement. IBNR reserves relate
primarily to unreported events that, based on industry
information, managements experience and actuarial
evaluation, can reasonably be expected to have occurred and are
reasonably likely to result in a loss to our company. IBNR
reserves also relate to estimated development of reported events
that based on industry information, managements experience
and actuarial evaluation, can reasonably be expected to reach
our attachment point and are reasonably likely to result in a
loss to our company. We also include IBNR changes in the values
of claims that have been reported to us but are not yet settled.
Each claim is settled individually based upon its merits and it
is not unusual for a claim to take years after being reported to
settle, especially if legal action is involved. As a result,
reserves for losses and loss expenses include significant
estimates for IBNR reserves.
The reserve for IBNR is estimated by management for each line of
business based on various factors, including underwriters
expectations about loss experience, actuarial analysis,
comparisons with the results of industry benchmarks and loss
experience to date. The reserve for IBNR is calculated as the
ultimate amount of losses and loss expenses less cumulative paid
losses and loss expenses and case reserves. Our actuaries employ
generally accepted actuarial methodologies to determine
estimated ultimate loss reserves.
While management believes that our case reserves and IBNR are
sufficient to cover losses assumed by us, there can be no
assurance that losses will not deviate from our reserves,
possibly by material amounts. The methodology of estimating loss
reserves is periodically reviewed to ensure that the assumptions
made continue to be appropriate. To the extent actual reported
losses exceed estimated losses, the carried estimate of the
ultimate losses will be increased (i.e., unfavorable reserve
development), and to the extent actual reported losses are less
than estimated losses, the carried estimate of ultimate losses
will be reduced (i.e., favorable reserve development). We record
any changes in our loss reserve estimates and the related
reinsurance recoverables in the periods in which they are
determined.
The estimate of reserves for our property insurance and property
reinsurance lines of business relies primarily on traditional
loss reserving methodologies, utilizing selected paid and
reported loss development factors. In the
71
property lines of business, claims are generally reported and
paid within a relatively short period of time (shorter
tail lines) during and following the policy coverage
period. This generally enables us to determine with greater
certainty our estimate of ultimate losses and loss expenses.
Our casualty insurance and casualty reinsurance lines of
business include general liability risks, healthcare and
professional liability risks. Claims may be reported or settled
several years after the coverage period has terminated for these
lines of business (longer tail lines), which
increases uncertainties of our reserve estimates in such lines.
In addition, our attachment points for these longer tail lines
are often relatively high, making reserving for these lines of
business more difficult than shorter tail lines due to having to
estimate whether the severity of the estimated losses will
exceed our attachment point. We establish a case reserve when
sufficient information is gathered to make a reasonable estimate
of the liability, which often requires a significant amount of
information and time. Due to the lengthy reporting pattern of
these casualty lines, reliance is placed on industry benchmarks
supplemented by our own experience. For expected loss ratio
selections, we are giving greater consideration to our existing
experience supplemented with analysis of loss trends, rate
changes and experience of peer companies.
Our reinsurance treaties are reviewed individually, based upon
individual characteristics and loss experience emergence. Loss
reserves on assumed reinsurance have unique features that make
them more difficult to estimate than direct insurance. We
establish loss reserves upon receipt of advice from a cedent
that a reserve is merited. Our claims staff may establish
additional loss reserves where, in their judgment, the amount
reported by a cedent is potentially inadequate. The following
are the most significant features that make estimating loss
reserves on assumed reinsurance difficult:
|
|
|
|
|
Reinsurers have to rely upon the cedents and reinsurance
intermediaries to report losses in a timely fashion.
|
|
|
|
Reinsurers must rely upon cedents to price the underlying
business appropriately.
|
|
|
|
Reinsurers have less predictable loss emergence patterns than
direct insurers, particularly when writing
excess-of-loss
reinsurance.
|
For
excess-of-loss
reinsurance, cedents generally are required to report losses
that either exceed 50% of the retention, have a reasonable
probability of exceeding the retention or meet serious injury
reporting criteria. All reinsurance claims that are reserved are
reviewed at least every six months. For quota share reinsurance
treaties, cedents are required to give a periodic statement of
account, generally monthly or quarterly. These periodic
statements typically include information regarding written
premiums, earned premiums, unearned premiums, ceding
commissions, brokerage amounts, applicable taxes, paid losses
and outstanding losses. They can be submitted 60 to 90 days
after the close of the reporting period. Some quota share
reinsurance treaties have specific language regarding earlier
notice of serious claims.
Reinsurance generally has a greater time lag than direct
insurance in the reporting of claims. The time lag is caused by
the claim first being reported to the cedent, then the
intermediary (such as a broker) and finally the reinsurer. This
lag can be up to six months or longer in certain cases. There is
also a time lag because the insurer may not be required to
report claims to the reinsurer until certain reporting criteria
are met. In some instances this could be several years while a
claim is being litigated. We use reporting factors based on data
from the Reinsurance Association of America to adjust for time
lags. We also use historical treaty-specific reporting factors
when applicable. Loss and premium information are entered into
our reinsurance system by our claims department and our
accounting department on a timely basis.
We record the individual case reserves sent to us by the cedents
through the reinsurance intermediaries. Individual claims are
reviewed by our reinsurance claims department and adjusted as
deemed appropriate. The loss data received from the
intermediaries is checked for reasonableness and for known
events. Details of the loss listings are reviewed during routine
claim audits.
The expected loss ratios that we assign to each treaty are based
upon analysis and modeling performed by a team of actuaries. The
historical data reviewed by the team of pricing actuaries is
considered in setting the reserves for each cedent. The
historical data in the submissions is matched against our
carried reserves for our historical treaty years.
Loss reserves do not represent an exact calculation of
liability. Rather, loss reserves are estimates of what we expect
the ultimate resolution and administration of claims will cost.
These estimates are based on actuarial and statistical
projections and on our assessment of currently available data,
as well as estimates of future trends in
72
claims severity and frequency, judicial theories of liability
and other factors. Loss reserve estimates are refined as
experience develops and as claims are reported and resolved. In
addition, the relatively long periods between when a loss occurs
and when it may be reported to our claims department for our
casualty insurance and casualty reinsurance lines of business
increase the uncertainties of our reserve estimates in such
lines.
We utilize a variety of standard actuarial methods in our
analysis. The selections from these various methods are based on
the loss development characteristics of the specific line of
business. For lines of business with long reporting periods such
as casualty reinsurance, we may rely more on an expected loss
ratio method (as described below) until losses begin to develop.
For lines of business with short reporting periods such as
property insurance, we may rely more on a paid loss development
method (as described below) as losses are reported relatively
quickly. The actuarial methods we utilize include:
Paid Loss Development Method. We estimate
ultimate losses by calculating past paid loss development
factors and applying them to exposure periods with further
expected paid loss development. The paid loss development method
assumes that losses are paid at a consistent rate. The paid loss
development method provides an objective test of reported loss
projections because paid losses contain no reserve estimates. In
some circumstances, paid losses for recent periods may be too
varied for accurate predictions. For many coverages, especially
casualty coverages, claim payments are made slowly and it may
take years for claims to be fully reported and settled. These
payments may be unreliable for determining future loss
projections because of shifts in settlement patterns or because
of large settlements in the early stages of development.
Choosing an appropriate tail factor to determine the
amount of payments from the latest development period to the
ultimate development period may also require considerable
judgment, especially for coverages that have long payment
patterns. As we have limited payment history, we have had to
supplement our paid loss development patterns with appropriate
benchmarks.
Reported Loss Development Method. We estimate
ultimate losses by calculating past reported loss development
factors and applying them to exposure periods with further
expected reported loss development. Since reported losses
include payments and case reserves, changes in both of these
amounts are incorporated in this method. This approach provides
a larger volume of data to estimate ultimate losses than the
paid loss development method. Thus, reported loss patterns may
be less varied than paid loss patterns, especially for coverages
that have historically been paid out over a long period of time
but for which claims are reported relatively early and have case
loss reserve estimates established. This method assumes that
reserves have been established using consistent practices over
the historical period that is reviewed. Changes in claims
handling procedures, large claims or significant numbers of
claims of an unusual nature may cause results to be too varied
for accurate forecasting. Also, choosing an appropriate
tail factor to determine the change in reported loss
from the latest development period to the ultimate development
period may require considerable judgment. As we have limited
reported history, we have had to supplement our reported loss
development patterns with appropriate benchmarks.
Expected Loss Ratio Method. To estimate
ultimate losses under the expected loss ratio method, we
multiply earned premiums by an expected loss ratio. The expected
loss ratio is selected utilizing industry data, historical
company data and professional judgment. This method is
particularly useful for new insurance companies or new lines of
business where there are no historical losses or where past loss
experience is not credible.
Bornhuetter-Ferguson Paid Loss Method. The
Bornhuetter-Ferguson paid loss method is a combination of the
paid loss development method and the expected loss ratio method.
The amount of losses yet to be paid is based upon the expected
loss ratios and the expected percentage of losses unpaid. These
expected loss ratios are modified to the extent paid losses to
date differ from what would have been expected to have been paid
based upon the selected paid loss development pattern. This
method avoids some of the distortions that could result from a
large development factor being applied to a small base of paid
losses to calculate ultimate losses. This method will react
slowly if actual loss ratios develop differently because of
major changes in rate levels, retentions or deductibles, the
forms and conditions of reinsurance coverage, the types of risks
covered or a variety of other changes.
73
Bornhuetter-Ferguson Reported Loss Method. The
Bornhuetter-Ferguson reported loss method is similar to the
Bornhuetter-Ferguson paid loss method with the exception that it
uses reported losses and reported loss development factors.
During 2010, 2009 and 2008, we adjusted our reliance on
actuarial methods utilized for certain casualty lines of
business and loss years within our U.S. insurance and
international insurance segments from using a blend of the
Bornhuetter-Ferguson reported loss method and the expected loss
ratio method to using only the
Bornhuetter-Ferguson
reported loss method. Also during 2010 and 2009, we began
adjusting our reliance on actuarial methods utilized for certain
other casualty lines of business and loss years within all of
our operating segments including the reinsurance segment, by
placing greater reliance on the Bornhuetter-Ferguson reported
loss method than on the expected loss ratio method. Placing
greater reliance on more responsive actuarial methods for
certain casualty lines of business and loss years within each of
our operating segments is a natural progression as we mature as
a company and gain sufficient historical experience of our own
that allows us to further refine our estimate of the reserve for
losses and loss expenses. We believe utilizing only the
Bornhuetter-Ferguson reported loss method for older loss years
will more accurately reflect the reported loss activity we have
had thus far in our ultimate loss ratio selections, and will
better reflect how the ultimate losses will develop over time.
We will continue to utilize the expected loss ratio method for
the most recent loss years until we have sufficient historical
experience to utilize other acceptable actuarial methodologies.
We expect that the trend of placing greater reliance on more
responsive actuarial methods, for example from the expected loss
ratio method to the Bornhuetter-Ferguson reported loss method,
to continue as both (1) our loss years mature and become
more statistically reliable and (2) as we build databases
of our internal loss development patterns. The expected loss
ratio remains a key assumption as the Bornhuetter-Ferguson
methods rely upon an expected loss ratio selection and a loss
development pattern selection.
The key assumptions used to arrive at our best estimate of loss
reserves are the expected loss ratios, rate of loss cost
inflation, selection of benchmarks and reported and paid loss
emergence patterns. Our reporting factors and expected loss
ratios are based on a blend of our own experience and industry
benchmarks for longer tailed business and primarily our own
experience for shorter tail business. The benchmarks selected
were those that we believe are most similar to our underwriting
business.
Our expected loss ratios for shorter tail lines change from year
to year. As our losses from shorter tail lines of business are
reported relatively quickly, we select our expected loss ratios
for the most recent years based upon our actual loss ratios for
our older years adjusted for rate changes, inflation, cost of
reinsurance and average storm activity. For the shorter tail
lines, we initially used benchmarks for reported and paid loss
emergence patterns. As we mature as a company, we have begun
supplementing those benchmark patterns with our actual patterns
as appropriate. For the longer tail lines, we continue to use
benchmark patterns, although we update the benchmark patterns as
additional information is published regarding the benchmark data.
For shorter tail lines, the primary assumption that changed
during both 2010 as compared to 2009 and 2009 as compared to
2008 as it relates to prior year losses was actual paid and
reported loss emergence patterns were generally less severe than
estimated for each year due to lower frequency and severity of
reported losses. As a result of this change, we recognized net
favorable prior year reserve development in both 2010 and 2009.
However, for losses occurring in 2010, we did experience
significant property insurance and property reinsurance losses,
which resulted in us strengthening our reserves related to
current year losses. Of the $121.0 million of reserve
strengthening in our property insurance and property reinsurance
lines of business for current year losses, $98.3 million
was catastrophe related (Chilean and New Zealand earthquakes and
the Australian floods), and $22.7 million for attritional
losses. We will continue to evaluate and monitor the development
of these losses and the impact it has on our current and future
assumptions. We believe recognition of the reserve changes in
the period they were recorded was appropriate since a pattern of
reported losses had not emerged and the loss years were
previously too immature to deviate from the expected loss ratio
method in prior periods.
The selection of the expected loss ratios for the longer tail
lines is our most significant assumption. Due to the lengthy
reporting pattern of longer tail lines, we supplement our own
experience with industry benchmarks of expected loss ratios and
reporting patterns in addition to our own experience. For our
longer tail lines, the primary assumption that changed during
both 2010 as compared to 2009 and 2009 as compared to 2008 as it
relates to prior year losses was using the Bornhuetter-Ferguson
loss development method for certain casualty lines of business
and
74
loss years as discussed above. This method calculated a lower
projected loss ratio based on loss emergence patterns to date.
As a result of the change in the expected loss ratio, we
recognized net favorable prior year reserve development in 2010
and 2009. We believe that recognition of the reserve changes in
the period they were recorded was appropriate since a pattern of
reported losses had not emerged and the loss years were
previously too immature to deviate from the expected loss ratio
method in prior periods.
Our overall change in the loss reserve estimates related to
prior years increased as a percentage of total carried reserves
during 2010 and 2009. On an opening carried reserve base of
$3,841.8 million, after reinsurance recoverable, we had a
net decrease of $313.3 million, or 8.2%, during 2010, and
for 2009 we had a net decrease of $248.0 million, or 6.7%,
on an opening carried reserve base of $3,688.5 million,
after reinsurance recoverables. We believe that these changes
are reasonable given the long-tail nature of our business.
There is potential for significant variation in the development
of loss reserves, particularly for the casualty lines of
business due to their long tail nature and high attachment
points. The maturing of our casualty insurance and reinsurance
loss reserves have caused us to reduce what we believe is a
reasonably likely variance in the expected loss ratios for older
loss years. As of December 31, 2010 and 2009, we believe
reasonably likely variances in our expected loss ratio in
percentage points for our loss years are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
Loss Year
|
|
2010
|
|
|
2009
|
|
|
2003
|
|
|
2.0
|
%
|
|
|
4.0
|
%
|
2004
|
|
|
4.0
|
%
|
|
|
6.0
|
%
|
2005
|
|
|
6.0
|
%
|
|
|
8.0
|
%
|
2006
|
|
|
8.0
|
%
|
|
|
10.0
|
%
|
2007
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
2008
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
2009
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
2010
|
|
|
10.0
|
%
|
|
|
|
|
The change in the reasonably likely variance for the 2003
through 2006 loss years in 2010 compared to 2009 is due to
giving greater weight to the Bornhuetter-Ferguson loss
development method for additional lines of business during 2010
and additional development of losses. The reasonably likely
variance of our expected loss ratio for all loss years for our
casualty insurance and casualty reinsurance lines of business
was seven percentage points as of December 31, 2010 and
2009. If our final casualty insurance and reinsurance loss
ratios vary by seven percentage points from the expected loss
ratios in aggregate, our required net reserves after reinsurance
recoverable would increase or decrease by approximately
$597.3 million. Because we expect a small volume of large
claims, it is more difficult to estimate the ultimate loss
ratios, so we believe the variance of our loss ratio selection
could be relatively wide. This would result in either an
increase or decrease to income, before income taxes, and total
shareholders equity of approximately $597.3 million.
As of December 31, 2010, this represented approximately
19.4% of total shareholders equity. In terms of liquidity,
our contractual obligations for reserves for losses and loss
expenses would also increase or decrease by approximately
$597.3 million after reinsurance recoverable. If our
obligations were to increase by $597.3 million, we believe
we currently have sufficient cash and investments to meet those
obligations. We believe showing the impact of an increase or
decrease in the expected loss ratios is useful information
despite the fact that we have realized only net favorable prior
year loss development each calendar year. We continue to use
industry benchmarks to supplement our expected loss ratios, and
these industry benchmarks have implicit in them both favorable
and unfavorable loss development, which we incorporate into our
selection of the expected loss ratios.
75
The following tables provide our ranges of loss and loss expense
reserve estimates by business segment as of December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for Losses and Loss Expenses
|
|
|
|
Gross of Reinsurance Recoverable(1)
|
|
|
|
Carried
|
|
|
Low
|
|
|
High
|
|
|
|
Reserves
|
|
|
Estimate
|
|
|
Estimate
|
|
|
|
($ in millions)
|
|
|
U.S. insurance
|
|
$
|
1,431.7
|
|
|
$
|
1,133.9
|
|
|
$
|
1,560.6
|
|
International insurance
|
|
|
2,226.7
|
|
|
|
1,687.1
|
|
|
|
2,568.5
|
|
Reinsurance
|
|
|
1,220.8
|
|
|
|
922.1
|
|
|
|
1,443.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for Losses and Loss Expenses
|
|
|
|
Net of Reinsurance Recoverable(2)
|
|
|
|
Carried
|
|
|
Low
|
|
|
High
|
|
|
|
Reserves
|
|
|
Estimate
|
|
|
Estimate
|
|
|
|
($ in millions)
|
|
|
U.S. insurance
|
|
$
|
1,035.1
|
|
|
$
|
811.1
|
|
|
$
|
1,129.5
|
|
International insurance
|
|
|
1,695.7
|
|
|
|
1,284.8
|
|
|
|
1,964.9
|
|
Reinsurance
|
|
|
1,220.8
|
|
|
|
919.4
|
|
|
|
1,439.6
|
|
|
|
|
(1) |
|
For statistical reasons, it is not appropriate to add together
the ranges of each business segment in an effort to determine
the low and high range around the consolidated loss reserves. On
a gross basis, the consolidated low estimate is
$4,011.2 million and the consolidated high estimate is
$5,305.0 million. |
|
(2) |
|
For statistical reasons, it is not appropriate to add together
the ranges of each business segment in an effort to determine
the low and high range around the consolidated loss reserves. On
a net basis, the consolidated low estimate is
$3,237.8 million and the consolidated high estimate is
$4,311.7 million. |
Our range for each business segment was determined by utilizing
multiple actuarial loss reserving methods along with various
assumptions of reporting patterns and expected loss ratios by
loss year. The various outcomes of these techniques were
combined to determine a reasonable range of required loss and
loss expense reserves. While we believe our approach to
determine the range of loss and loss expense is reasonable,
there are no assurances that actual loss experience will be
within the ranges of loss and loss expense noted above.
Our selection of the actual carried reserves has typically been
above the midpoint of the range. As of December 31, 2010,
we were 4.7% above the midpoint of the consolidated net loss
reserve range. We believe that we should be prudent in our
reserving practices due to the lengthy reporting patterns and
relatively large limits of net liability for any one risk of our
direct excess casualty business and of our casualty reinsurance
business. Thus, due to this uncertainty regarding estimates for
reserve for losses and loss expenses, we have carried our
consolidated reserve for losses and loss expenses, net of
reinsurance recoverable, above the midpoint of the low and high
estimates for the consolidated net losses and loss expenses. We
believe that relying on the more prudent actuarial indications
is appropriate for these lines of business.
Ceded
Reinsurance
We cede insurance to reinsurers in order to limit our maximum
loss, to protect against concentration of risk within our
portfolio and to manage our exposure to catastrophic events.
Because the ceding of insurance does not discharge us from our
primary obligation to the insureds, we remain liable to the
extent that our reinsurers do not meet their obligations under
the reinsurance agreements. Therefore, we regularly evaluate the
financial condition of our reinsurers and monitor concentration
of credit risk. No provision has been made for unrecoverable
reinsurance as of December 31, 2010 and 2009 as we believe
that all reinsurance balances will be recovered.
When we reinsure a portion of our exposures, we pay reinsurers a
portion of premiums received on the reinsured policies. Total
premiums ceded pursuant to reinsurance contracts entered into by
our company with a variety of reinsurers were
$365.9 million, $375.2 million and $338.4 million
for the years ended December 31, 2010, 2009 and 2008,
respectively.
76
The following table illustrates our gross premiums written and
ceded for the years ended December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Premiums Written and
|
|
|
|
Premiums Ceded
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in millions)
|
|
|
Gross
|
|
$
|
1,758.4
|
|
|
$
|
1,696.3
|
|
|
$
|
1,445.6
|
|
Ceded
|
|
|
(365.9
|
)
|
|
|
(375.2
|
)
|
|
|
(338.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
1,392.5
|
|
|
$
|
1,321.1
|
|
|
$
|
1,107.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded as percentage of gross
|
|
|
20.8
|
%
|
|
|
22.1
|
%
|
|
|
23.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table illustrates the effect of our reinsurance
ceded strategies on our results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in millions)
|
|
|
Premiums written ceded
|
|
|
365.9
|
|
|
|
375.2
|
|
|
|
338.4
|
|
Premiums earned ceded
|
|
|
365.3
|
|
|
|
381.2
|
|
|
|
347.0
|
|
Losses and loss expenses ceded
|
|
|
165.8
|
|
|
|
196.6
|
|
|
|
176.4
|
|
Acquisition costs ceded
|
|
|
81.5
|
|
|
|
79.6
|
|
|
|
70.8
|
|
We had net cash outflows relating to ceded reinsurance
activities (premiums paid less losses recovered and net ceding
commissions received) of approximately $132.6 million,
$116 million and $58 million for the years ended
December 31, 2010, 2009 and 2008, respectively. The net
cash outflows in all years are reflective of fewer losses that
were recoverable under our reinsurance coverages.
Our reinsurance treaties are generally purchased on an annual
basis and are therefore subject to yearly renegotiation. The
treaties typically specify ceding commissions, and include
provisions for required reporting to the reinsurers,
responsibility for taxes, arbitration of disputes and the
posting of security for the reinsurance recoverable under
certain circumstances, such as a downgrade in the
reinsurers financial strength rating. The amount of risk
ceded by us to reinsurers is subject to maximum limits which
vary by line of business and by type of coverage. We also
purchase a limited amount of facultative reinsurance, which
provides cover for specified policies, rather than for whole
classes of business.
The examples below illustrate the types of treaty reinsurance
arrangements in force at December 31, 2010:
|
|
|
|
|
General Property: We purchased both quota
share reinsurance for our general property business written in
our U.S. insurance and international insurance segments, as
well as
excess-of-loss
cover providing protection for specified classes of catastrophe.
We have also purchased a limited amount of facultative
reinsurance, which provides cover for specified general property
policies.
|
|
|
|
General Casualty: We have purchased variable
quota share reinsurance for our general casualty business since
December 2002. At year-end 2010, the percentage ceded varied by
both location of writing office and by limits reinsured, with a
significantly larger cession being effective for policies above
$25 million in limits. We also have excess-of-loss cover in
place for general casualty business written in our Asian branch
offices.
|
|
|
|
Professional Liability: For professional
liability policies, our reinsurance varied by writing office and
by policy type. Professional liability policies written in our
Bermuda, European and U.S. offices were quota-share
reinsured with cession percentages dependent upon location.
Additionally, the professional liability policies written in the
United States, as well as those originating within our Asian
branch offices, were reinsured on an excess-of-loss basis.
|
|
|
|
Healthcare: We purchased both quota share and
excess-of-loss
reinsurance protection for our healthcare line of business
written by our Bermuda and U.S. offices, with the
U.S. healthcare business utilizing variable quota share.
The cession percentage for healthcare business varies by policy
limit and by underwriting office
|
77
|
|
|
|
|
location. As is the case with general casualty and professional
liability, our healthcare business originating in Asia is under
an excess-of-loss reinsurance arrangement.
|
The following table illustrates our reinsurance recoverable as
of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Recoverable
|
|
|
|
as of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in millions)
|
|
|
Ceded case reserves
|
|
$
|
206.2
|
|
|
$
|
266.5
|
|
Ceded IBNR reserves
|
|
|
721.4
|
|
|
|
653.5
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable
|
|
$
|
927.6
|
|
|
$
|
920.0
|
|
|
|
|
|
|
|
|
|
|
As noted above, we remain obligated for amounts ceded in the
event our reinsurers do not meet their obligations. Accordingly,
we have evaluated the reinsurers that are providing reinsurance
protection to us and will continue to monitor their credit
ratings and financial stability. We generally have the right to
terminate our treaty reinsurance contracts at any time, upon
prior written notice to the reinsurer, under specified
circumstances, including the assignment to the reinsurer by
A.M. Best of a financial strength rating of less than
A-. As of December 31, 2010, approximately 99%
of ceded case reserves and 99% of our ceded IBNR were
recoverable from reinsurers who had an A.M. Best rating of
A− or higher.
We determine what portion of the losses will be recoverable
under our reinsurance policies by reference to the terms of the
reinsurance protection purchased. This determination is
necessarily based on the underlying loss estimates and,
accordingly, is subject to the same uncertainties as the
estimate of case reserves and IBNR reserves.
The following table shows our reinsurance recoverables by
operating segment as of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in millions)
|
|
|
U.S. insurance
|
|
$
|
396.6
|
|
|
$
|
351.8
|
|
International insurance
|
|
|
531.0
|
|
|
|
566.3
|
|
Reinsurance
|
|
|
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance recoverable
|
|
$
|
927.6
|
|
|
$
|
920.0
|
|
|
|
|
|
|
|
|
|
|
Historically, our reinsurance recoverables related primarily to
our property lines of business, which being short tail in
nature, are not subject to the same variations as our casualty
lines of business. However, during 2010 and 2009 we have
increased the amount of reinsurance we utilize for our casualty
lines of business in the U.S. insurance and international
insurance segments; and as such, the reinsurance recoverables
from our casualty lines of business have increased over the past
several years. As the reinsurance recoverables are subject to
the same uncertainties as the estimate of case reserves and IBNR
reserves, if our final casualty insurance ceded loss ratios vary
by nine percentage points from the expected loss ratios in
aggregate, our required reinsurance recoverable would increase
or decrease by approximately $119.6 million. This would
result in either an increase or decrease to income before income
taxes and shareholders equity of approximately
$119.6 million. As of December 31, 2010, this amount
represented approximately 3.9% of total shareholders
equity.
Premiums
and Acquisition Costs
Premiums are recognized as written on the inception date of a
policy. For certain types of business written by us, notably
reinsurance, premium income may not be known at the contract
inception date. In the case of quota share reinsurance assumed
by us, the underwriter makes an estimate of premium income at
inception as the premium income is typically derived as a
percentage of the underlying policies written by the cedents.
The underwriters estimate is based on statistical data
provided by reinsureds and the underwriters judgment and
experience. Such estimations are refined over the reporting
period of each treaty as actual written premium information is
reported by ceding companies and intermediaries. Management
reviews estimated premiums at least quarterly and any
adjustments are recorded in the period in which they become
known. As of December 31, 2010, our changes
78
in premium estimates have been adjustments ranging from
approximately negative 4% for the 2009 treaty year, to
approximately positive 22% for the 2005 treaty year. Applying
this range to our 2010 quota share reinsurance treaties, our
gross premiums written in the reinsurance segment could decrease
by approximately $8.9 million or increase by approximately
$50.6 million over the next three years. Given the recent
trend of downward adjustments on premium estimates, we believe a
reasonably likely change in our premium estimate would be the
midpoint of the negative 4% and 22%, or 9%, for a change of
$20.8 million. There would also be a related increase in
loss and loss expenses and acquisition costs due to the increase
in gross premiums written. It is reasonably likely as our
historical experience develops that we may have fewer or smaller
adjustments to our estimated premiums, and therefore could have
changes in premium estimates lower than the range historically
experienced. Total premiums estimated on quota share reinsurance
contracts for the years ended December 31, 2010, 2009 and
2008 represented approximately 13%, 12% and 13%, respectively,
of total gross premiums written.
Other insurance and reinsurance policies can require that the
premium be adjusted at the expiry of a policy to reflect the
risk assumed by us. Premiums resulting from such adjustments are
estimated and accrued based on available information.
Fair
Value of Financial Instruments
In accordance with U.S. GAAP, we are required to recognize
certain assets at their fair value in our consolidated balance
sheets. This includes our fixed maturity investments, hedge
funds and other invested assets. 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 which are unobservable for the asset or liability.
|
At each measurement date, we estimate the fair value of the
financial instruments using various valuation techniques. We
utilize, to the extent available, quoted market prices in active
markets or observable market inputs in estimating the fair value
of our financial instruments. When quoted market prices or
observable market inputs are not available, we utilize valuation
techniques that rely on unobservable inputs to estimate the fair
value of financial instruments. The following describes the
valuation techniques we used to determine the fair value of
financial instruments held as of December 31, 2010 and what
level within the U.S. GAAP fair value hierarchy the
valuation technique resides.
U.S. government and U.S. 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 U.S. government securities
are based on quoted market prices in active markets, and are
included in the Level 1 fair value hierarchy. We believe
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.
79
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
corporations that are diversified across a wide range of issuers
and industries. The fair values of corporate bonds that are
short-term are priced using the spread above the London
Interbank Offered Rate yield curve, and the fair value of
corporate bonds 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 bonds are included
in the Level 2 fair value hierarchy.
Mortgage-backed: Principally comprised of
pools of residential and commercial mortgages originated by both
U.S. government agencies (such as the Federal National
Mortgage Association) and
non-U.S. government
agency originators. 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 the 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 we are 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 fair value 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 we are 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 fair value hierarchy.
Hedge funds: Comprised of hedge funds invested
in a range of diversified strategies. In accordance with
U.S. GAAP, the fair values of the hedge funds are based on
the net asset value of the funds as reported by the fund
manager, which is not considered an observable input, and as
such, the fair values of the hedge funds are included in the
Level 3 fair value hierarchy.
The following table shows the pricing sources of our fixed
maturity investments held as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
|
Fixed Maturity
|
|
|
Percentage of
|
|
|
|
|
|
|
Investments as of
|
|
|
Total Fixed
|
|
|
Fair Value
|
|
|
|
December 31, 2010
|
|
|
Maturity
|
|
|
Hierarchy
|
|
Pricing Sources
|
|
($ in millions)
|
|
|
Investments
|
|
|
Level
|
|
|
Barclay indices
|
|
$
|
4,684.6
|
|
|
|
70.3
|
%
|
|
|
1 and 2
|
|
Interactive Data Pricing
|
|
|
997.7
|
|
|
|
15.0
|
|
|
|
2
|
|
Reuters pricing service
|
|
|
252.8
|
|
|
|
3.8
|
|
|
|
2
|
|
Broker-dealer quotes
|
|
|
221.3
|
|
|
|
3.3
|
|
|
|
3
|
|
Merrill Lynch indices
|
|
|
166.9
|
|
|
|
2.5
|
|
|
|
2
|
|
International indices
|
|
|
68.6
|
|
|
|
1.0
|
|
|
|
2
|
|
Other sources
|
|
|
269.1
|
|
|
|
4.1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,661.0
|
|
|
|
100.0
|
%
|
|
|
|
|
80
The following table shows the pricing sources of our fixed
maturity investments held as of December 31, 2009: