Allied World Reports Record Net Income
Allied World Assurance Company Holdings yesterday [Feb. 17] reported record net income of $665.0 million, or $13.32 per diluted share, for the year ended December 31, 2010 compared to net income of $606.9 million, or $11.67 per diluted share, for the year ended December 31, 2009. Net income for the fourth quarter of 2010 was $92.8 million, or $2.13 per diluted share, compared to net income of $161.3 million, or $3.05 per diluted share, for the fourth quarter of 2009.
The global re/insurer — which redomiciled from Bermuda to Switzerland last year — still maintains a large presence on the island and also has offices in Atlanta, Boston, Chicago, Costa Mesa, Dallas, Dublin, Farmington (CT), Hong Kong, London, Los Angeles, New York, San Francisco, Singapore and Zug.
The company reported operating income of $397.8 million, or $7.97 per diluted share, for the year ended December 31, 2010 compared to operating income of $537.7 million, or $10.34 per diluted share, for the year ended December 31, 2009. Operating income for the fourth quarter of 2010 was $97.3 million, or $2.24 per diluted share, compared to operating income of $131.9 million, or $2.49 per diluted share, for the fourth quarter of 2009.
President and CEO Scott Carmilani commented, “The insurance industry continued to face significant hurdles throughout 2010. In addition to the heightened rate pressure caused by strong competition and an overabundance of capacity, multiple global catastrophes increased loss costs while generally weak economic conditions posed additional challenges. In spite of these factors, we are very proud of our financial, strategic and operational accomplishments throughout the year.”
“We grew book value per share by 25% producing a record net income of $665 million for the year. Just as importantly, we’ve improved our positioning for the future by redomiciling our holding company to Switzerland, establishing our own Lloyd’s Syndicate 2232 for broader distribution, and further diversifying our products and service capabilities, while lowering our dependence on more volatile segments of the market. In aggregate, these initiatives have helped us generate $197 million in gross revenues from new products and geographies that allowed us to modestly increase our gross premiums written by 4% for the year.”
Mr. Carmilani continued, “We were also very successful on the capital management front during 2010 as we took advantage of our depressed valuation position and deployed significant excess capital to the benefit of our shareholders. We further enhanced our capital flexibility during the fourth quarter through the issuance of $300 million of senior notes, which were at a very favorable interest rate and very well received by the fixed income market. The company begins 2011 in a strong capital position, which provides security to our current policyholders while leaving us with the flexibility to pursue additional potential opportunities for profitable growth.”
Underwriting Results
Gross premiums written were $381.9 million in the fourth quarter of 2010, an 18.6% increase compared to $322.1 million in the fourth quarter of 2009. For the year ended December 31, 2010, gross premiums written totaled $1,758.4 million, a 3.7% increase compared to $1,696.3 million for the year ended December 31, 2009. Net premiums written were $287.2 million in the fourth quarter of 2010, a 22.9% increase compared to $233.7 million in the fourth quarter of 2009. For the year ended December 31, 2010, net premiums written totaled $1,392.5 million, a 5.4% increase compared to $1,321.1 million for the year ended December 31, 2009. These increases were primarily due to the expansion of our reinsurance and U.S. insurance business offset by our selectively paring back general property, energy and professional liability risks in our international insurance segment that did not meet our underwriting requirements.
Net premiums earned in the fourth quarter of 2010 were $342.8 million, a 3.7% increase compared to $330.5 million in the fourth quarter of 2009. For the year ended December 31, 2010, net premiums earned totaled $1,359.5 million, a 3.2% increase from net premiums earned of $1,316.9 million for the year ended December 31, 2009. These increases were primarily due to the expansion of our reinsurance and U.S. insurance business.
The combined ratio was 82.8% in the fourth quarter of 2010 compared to 76.2% in the fourth quarter of 2009. The loss and loss expense ratio was 46.7% in the fourth quarter of 2010 compared to 42.8% in the fourth quarter of 2009. During the fourth quarter of 2010, the company recorded net favorable reserve development on prior loss years of $73.9 million, a benefit of 21.6 percentage points to the company’s loss and loss expense ratio for the quarter. This compares to the fourth quarter of 2009, where the company recorded net favorable reserve development on prior loss years of $77.7 million, a benefit of 23.5 percentage points to the company’s loss and loss expense ratio for that quarter. Absent prior year reserve adjustments, the loss and loss expense ratio related to the fourth quarter of 2010 was 68.3% compared to 66.3% for the fourth quarter of 2009. The fourth quarter 2010 ratio was impacted by $21.4 million of net losses, or 6.2 percentage points, from major loss driven events occurring during 2010.
For the year ended December 31, 2010, the combined ratio was 84.9% compared to 76.1% for the year ended December 31, 2009. For the year ended December 31, 2010, the company recorded net favorable reserve development on prior loss years of $313.3 million, a benefit of 23.1 percentage points to the company’s loss and loss expense ratio. For the year ended December 31, 2009, the company recorded net favorable reserve development on prior loss years of $248.0 million, a benefit of 18.8 percentage points to the company’s loss and loss expense ratio. Absent prior year reserve adjustments, the loss and loss expense ratio related to 2010 was 75.2% compared to 64.7% for 2009. This ratio was impacted by $164.6 million of net losses, or 12.1 percentage points, from major loss driven events occurring during 2010.
The company’s expense ratio was 36.1% for the fourth quarter of 2010 compared to 33.4% for the fourth quarter of 2009. The expense ratio was 32.8% for the year ended December 31, 2010 compared to 30.2% for the year ended December 31, 2009. Included in our expenses are significant one-time expenses incurred in connection with our redomestication to Switzerland, the establishment of our new Lloyd’s syndicate, as well as an increase in our incentive compensation expenses as a result of our exceeding our compensation targets. Without these items our expense ratio for the fourth quarter of 2010 would have been 33.4%.
Investment Results
The total return on the company’s investment portfolio for the three months and year ended December 31, 2010 was a loss of 0.2% and gain of 6.1%, respectively. Net investment income in the fourth quarter of 2010 was $50.2 million, a decrease of 31.5% from the $73.3 million of net investment income in the fourth quarter of 2009. For the year ended December 31, 2010, net investment income was $244.1 million, a decrease of 18.8% from the $300.7 million of net investment income for the year ended December 31, 2009. These decreases were due to a combination of use of funds for share repurchases, lower yields on our fixed maturity investments and an increased allocation to hedge funds, which contribute to our total return but carry no current yield. The book yield for the year ended December 31, 2010 was 3.3%, versus the annualized book yield for the year ended December 31, 2009 of 4.2%.
The company recorded net realized investment losses of $3.7 million and net realized investment gains of $285.6 million, respectively, for the three months and year ended December 31, 2010.
As of December 31, 2010 and December 31, 2009, net accumulated unrealized gains were $57.1 million and $149.8 million, respectively.
Shareholders’ Equity
As of December 31, 2010, shareholders’ equity was $3.1 billion, a decrease of 4.3% compared to $3.2 billion reported as of December 31, 2009. The decrease was primarily the result of our share repurchase activities during the year partially offset by net income for the year ended December 31, 2010 of $665.0 million, driven primarily by strong investment returns.
The company’s annualized net income return on average shareholders’ equity for the three months and year ended December 31, 2010 was 11.9% and 21.9%, respectively. The company’s annualized operating return on average shareholders’ equity for the three months and year ended December 31, 2010 was 12.5% and 13.1%, respectively.
Share Repurchases
As of December 31, 2010, diluted book value per share was $74.29, an increase of 2.6% and 24.7% compared to $72.40 and $59.56, respectively, as of September 30, 2010 and December 31, 2009.
In May 2010, the company announced a share repurchase program. During the fourth quarter 2010, the company repurchased 1,251,953 of its common shares in the open market at an average repurchase price of $59.20 per share for an aggregate cost of $74.1 million. For the year ended December 31, 2010, the company repurchased 4,651,279 of its common shares through its program in the open market at an average repurchase price of $51.41 per share for an aggregate cost of $239.1 million.
On November 6, 2010, the company repurchased the remainder of securities held by certain GS Capital Partners and other investment funds, which are affiliates of The Goldman Sachs Group, Inc. and founding shareholders of our company. These securities consist of 3,159,793 common shares and warrants to purchase an additional 1,500,000 common shares from Goldman Sachs. The aggregate repurchase price for these securities was $222.6 million. The transaction was funded using available cash on hand and was executed separately from the company’s share repurchase program.
Through December 31, 2010, the share repurchases related to our share repurchase program and repurchases from the affiliates of Goldman Sachs have had an estimated $5.11 net accretive impact on diluted book value per share.
On February 3, 2011, the company repurchased a warrant owned by American International Group, Inc. (“AIG”), a founding shareholder, which entitled AIG to purchase a total of 2,000,000 common shares. The aggregate repurchase price was $53.6 million. The transaction was funded using available cash on hand and was executed separately from the company’s share repurchase program.
Quarterly Dividend
On November 26, 2010, the board of directors declared a special dividend of $0.25 per common share related to the company’s redomestication to Switzerland. This special dividend was paid on November 26, 2010 to shareholders of record on November 15, 2010. Under Swiss law, the company will not be able to pay another dividend until two months after the company’s next annual meeting which is expected to take place in early May 2011. This special dividend provided a dividend to shareholders for the interim period until the next dividend can be paid.
Investment Supplement
Allied World will be providing additional information on its investment portfolio as of December 31, 2010. This information will be available at the “Investor Relations” section of the company’s website.
